Vol
Key Vol in Vol Curve refers to a number, such as 20% = 0.02 that equals an assumed flat volatility, i.e. a volatility that is assumed to apply at all times and at all levels of the underlying value.
Note, the Wizard creates by default a Vol Curve by setting the Vol to some arbitrary value as this corresponds to the simplest possible setup.
In practical applications, it is often acceptable to use a flat volatility, provided the value is carefully chosen to correspond to the given context.
For example, when pricing at-the-money European options that expire in one year, a flat vol is ok provided the value is chosen to equal the market implied vol for options expiring in one year and have strike equal to the current forward price.
But there are situations where a single flat vol cannot address the fact that the derivative instrument being priced involves more than one expiry and more than one strike.
One common example is an American option since its de facto expiry is probabilistic and can occur at any time the option holder decides to exercise the option.
Another common example is a European option with a knock-out barrier since the probability of the underlying price to hit the barrier cannot depend only on some single vol value but needs to consider how the vol changes with the level of the underlying price.
To illustrate the above, consider two stocks, X and Y, that are similar in all respects even in that they both have the same implied vols, for example a flat 20%, for all possible expiries.
This means, if one were to use a flat vol assumption with 20% as input to the key Vol, the pricing formula for a European option would return the same number for the option price in both cases, which would be correct.
But if one assumes stock Y is idiosyncratic in the sense that a) when its share price approaches a certain level B, its volatility collapses down to 0 and b) the share price itself cannot reach level B perhaps due to certain covenants in the shareholders' agreement.
Then when it comes to pricing barrier options with a knock-out barrier set at level B, using the flat vol of 20% would lead to a wrong option price in the case of the Y underlying since the share price of Y would never hit the barrier and therefore the correct option price would be higher.
The correct way of pricing a barrier option on Y would require as input not a single vol, but rather a table of vols where the rows and columns correspond to different levels of strike and expiry.
In such situations, it is therefore recommended to build the Vol Curve setting the key Vol Input to a value other than Flat