Smiles in delta

Abstract

Fukasawa introduced in [Fukasawa, Math Financ, 2012] two necessary conditions for no butterfly arbitrage which require that the $d_1$ and $d_2$ functions of the Black-Scholes formula have to be decreasing. In this article we characterize the set of smiles satisfying these conditions, using the parametrization of the smile in delta. We obtain a parametrization of the set via one real number and three positive functions. We also show that such smiles and their symmetric smiles can be transformed into smiles in the strike space by a bijection. Our result motivates the study of the challenging question of characterizing the subset of butterfly arbitrage-free smiles.