State the term Calibration in financial model

Question

State the term Calibration in financial model?

Answer 1

Calibration means selecting parameters in your model there the theoretical prices for exchange-traded contracts output by your model match closely, or as closely as possible, the market prices at an immediate in time. In a sense this is the opposite of fitting parameters to historical time series. When you match prices precisely then you are eliminating arbitrage opportunities, and it is why it is accepted.