I need help with calculating local volatility by most likely path calibration. In this ( http://www.algorithmica.se/research/Masters%20Thesis%20-%20Calibration%20of%20the%20Volatility%20surface.pdf ) paper (page 17) it says that I have to find the most likely path before I calculate the new local volatility. What does that mean and how do I obtain the most likely path?
Also on page 18 an optimization problem (equation (3.35)) is stated. Why do we have to solve this and how do I solve it?
Also on page 18 an optimization problem (equation (3.35)) is stated. Why do we have to solve this and how do I solve it?
