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Hard · derivatives · Quant Researcher interview question · volatility, sabr, quantitative-finance, derivatives
The SABR model (Stochastic Alpha, Beta, Rho) is a stochastic volatility framework widely used in interest rate derivatives to capture volatility smile and skew dynamics. By modeling the forward rate and volatility as correlated stochastic processes, it provides a more accurate pricing mechanism than constant volatility models like Black-Scholes. Hagan's 2002 asymptotic approximation offers a closed-form solution for implied volatility, making calibration and pricing computationally efficient. T