The Cliquet Option: A Volatility Case Study
Every few chapters, Wilmott stops talking about theory and shows you a concrete product that exposes why the theory matters so much. Chapter 56 does exactly this. The cliquet option is a structured product that looks innocent on the surface but hides extreme sensitivity to volatility modeling. If you price it with the wrong volatility assumptions, you can be off by a factor of ten in your risk estimate. That is not a rounding error. That is a blowup waiting to happen.