I am trying to understand the pricing of various types of swaptions.

Suppose I have a swap that starts in 3 months time. How would I go about pricing a swaption on this swap in the following cases:

1 Month option 2 Month option 3 Month option

I know the standard theory, which seems to let me price the swaption for a 3 month option. However I can't seem to figure out how to bring in the forward starting arrangement for the 1 and 2 month option.


The Black 76 swaption formula works for all these cases. The expiration time T= 1mo, 2mo or 3mo but the forward rate of the swap is the same in each case. The market will place different implied volatilities on these 3 options, according to the expectations of realized volatility in these 3 time periods.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.