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Being a house mainly focused on almost everything else that rates products we never had a "rates pricer", no surprise. The best connected to rates thing we have is an equity/fx/what have you / rates hybrid model where you can only have one rates underlying for which you diffuse the short rate in an Ho-Lee manner and we never used it.

Several years ago I had a request to price (mainly USD) swaptions (see The "I want to price swaptions" request), the swaptions being vanialla or mid-curve, request that I solved by using Bloomberg's volatility cubes for the vanilla swaptions and by writing mid-curve swaptions as options on the spread of two different forward swap rates for which I used historical correlation (the market on real spread options being inexistant). So nothing fancy but it did the job of allowing execution of simple rates volatility strats.

Now, I have a new rates request, of different nature and specification.

I was first asked to provide a rates pricer to price USD swaptions/cap/floors but also other products like : callable bonds, range accruals, products payment short term/long term CMS spreads, TARNs. The products were supposed to be freshly issued so that all involded forward rates where compounded SOFRs and I made my choice for a multi-factor short rate model (with 3 to 5 factor) with an hesitation regarding wheter or not to add and stochastic volatility factor. Basically everything that I have to price will depend on (forward) zero-coupons that I can explicitely calculate, sometimes tediously (think for instance about adapting swap rates approximate dynamics calculations from chapter 12 or 13 from Piterbarg and Andersen to the SOFR case), so eveything is fine.

But the request specification changed : now it will mainly be EUR instruments and still but just a tiny bit of USD instruments. And I've be sent term sheets of EUR instruments (range accs, TARN, callable bonds) where EURIBOR is still used even if the instruments were issued at the beginning of 2023 ! While EUR swaps and swaptions (on which I want to calibrate my model) are not EURIBOR but (compounded) ESTR linked. (The forward rates are calculated roughly as explained in p.1-3 from Mingyang Xu's "SOFR Derivative Pricing Using a Short Rate Model", in the same way as it is done in the USD case.)

So I have a 3 to 5 factors short rate model possibly with a stochastic volatility which diffuse a RFR (risk free rate), SOFR or ESTR, calibrated on swpations, that will have to price in the USD case SOFR linked light exotics (ok) and EURIBOR linked light exotics (not ok) in the EUR case.

Conclusion : either I change the model, or I make hypothesis on the basis between EURIBORs I will encouter and ESTR, or on the basis bewteen for instance EURIBOR3M and 3M ESTR forward rate deduced from daily compound of ESRT on the 3M period.

So I started to look the recent/semi recent litterature a bit, came across the two papers from Mercurio and Lyashenko on the FMM, which could do the job. (Hum, in these papers "forward-looking" forward rates are defined as would OIS swap rates be defined, and I don't see why this would be (for 3M periods for instance) the same as an EURIBOR 3M ... I posted a related question here.)

I still can't make up my mind, so that advises are welcome.

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    $\begingroup$ Not quite sure why your post has such an element of surprise a̶n̶d̶ c̶o̶n̶t̶e̶m̶p̶t̶ for Euribor. It is currently the dominant IRS interbank traded market. STIBOR, NIBOR, CIBOR also all exist in respective currencies based on the EU law regarding reformed indexes. Persoanlly I would also like to see all transition to RFR but it is definitely not happening imminently. $\endgroup$
    – Attack68
    Sep 8, 2023 at 9:49
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    $\begingroup$ Surprise yes (the exclamation mark), contempt not at all. $\endgroup$
    – Olórin
    Sep 8, 2023 at 10:27
  • $\begingroup$ So yes, I am surprised simply because I'm completely ignorant of the IR markets from a practical pov + thought that the SOFR move would catch up quite fast in the EUR markets. $\endgroup$
    – Olórin
    Sep 8, 2023 at 10:52
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    $\begingroup$ There are two main differences. JPY, GBP, USD all had cessation announcement for IBOR by central authorities effectively forcing everyone to adapt by a specific time with years of lead time. In Europe, the EU parliament created laws on the reform of indexes and those have been implemented, some as late as 2022. No central authority has yet made any cessation announcement so there is no rush or urgency to transition to RFR. Any full transitions is years away in my opinion although I still think it will happen. $\endgroup$
    – Attack68
    Sep 8, 2023 at 11:13
  • $\begingroup$ Ok, thanks for the update, it makes sense for me now. So I must have a model diffusing new (that is, RFR linked) foward rates as well as old (EURIBOR-like) forward rates. Hence, as far my screening of the recent literature is complete, something in Mercurio's and Lyashenko's "completed" FMM ... $\endgroup$
    – Olórin
    Sep 8, 2023 at 13:02

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