From model to application: Calibration to market data

We present the procedure of model calibration within the scope of financial applications. We discuss several models that are used to describe the movement of financial underlyings and state closed or semi-closed pricing formulas for basic financial instruments. Furthermore, we explain how these are used in a general calibration procedure with the purpose to determine sensible model parameters. Finally, we gather typical numerical issues that often arise in the context of calibration and that have to be handled with care.