Questions tagged [swaption]
The swaption tag has no usage guidance.
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Positive convexity swaptions
Can I please understand why payer swaptions have positive convexity and receiver swaptions have negative convexity? I understand payer swaptions are akin to put options on bonds and put options have ...
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37 views
Swaption - underlying forward swap rate
I H. Corb's bookabout interest rate swaps and oder derivatives, the present value of an T into n payer swaption is given via
$A\sigma\sqrt{T}\left[\frac{1}{\sqrt{2\pi}}e^{-\frac{d^2}{2}}+d\,\mathcal{...
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1answer
48 views
Swaption annuity factor
In H. Corb's book about interest rate swaps and oder derivatives, the present value of an T into n payer swaption is given via
$A\sigma\sqrt{T}\left[\frac{1}{\sqrt{2\pi}}e^{-\frac{d^2}{2}}+d\,\...
4
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1answer
128 views
Modern market conventions for interpreting interest rate swaptions quotations in a negative interest rate environment
I have broker data and I see three sets of swaption vol data:
Lognormal (Black)
Shifted Lognormal (Black with displaced diffusion)
Normal (Bachelier)
The quotes are given by the following key (Date, ...
8
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1answer
221 views
Swaptions Gamma Interview Questions
A while ago, I interviewed for a trader role and was given the below assignment (I didn't get the job). I wanted to revisit the questions to learn from my mistakes and be better prepared next time. ...
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1answer
52 views
Spreadlock derivatives
I would like to price a spreadlock forward swap and a spreadlock swaption but I don't find in the web any research article. Would you please provide me with some freely accessible papers on the web ? ...
2
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1answer
95 views
HJM or Short rates model?
When market practitioners do prefer HJM models to short rates models when it comes to pricing derivatives (other than swaptions and caps, let say light exotics to exotics) ?
To be more specific, ...
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0answers
28 views
Do I need to displace the swap rate in a displaced LMM swaption approximation?
In the displaced LMM swaption approximation (Rebonato et al), I'm trying to understand if I need to displace both the forward rate and the swap rate when computing the swap rate covariance matrix $C_{...
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2answers
233 views
Interest rates forward implied volatility models
I'm trying to find out which model to use to price a pur forward volatility product named VolBond marketed by structuring desks currently.
Let me introduce the products first:
Example 1: You pay 100 ...
0
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1answer
163 views
Bucketed gamma for swaptions
For a long 7Y1Y payer swaption, I understand that the overall gamma will be positive.
I see gamma to be positive in 7Y tenor and negative in 8Y - why would that be the case?
Intuitively, how would ...
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3answers
813 views
Forward implied volatility
Can one price accurately by only using vanilla options a derivative that is exposed/sensitive mainly to the forward volatility ?
If it is impossible in the real world, what do we mean by saying "...
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2answers
646 views
Mid-curve swaption
I would like to know how the mid-curve swaption could inform us about forward volatility.
In my understanding it is a swaption on a forward starting swap.
Let us say the midcurve swaption expires ...
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1answer
271 views
1y10y vs. 10y1y Swaption
Say you have two identical payer swaptions, exception for their terms and tenors. In other words, suppose you have two payer swaptions: $1y10y$ and $10y1y$.
All other things being equal, according ...
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1answer
94 views
Question on volatility equation for CMS pricing
In "Full implications of CMS convexity (Cedervall and Piterbarg, 2012)", a.k.a. "CMS: covering all bases (idem)", the authors develop a CMS model equipped with an annuity mapping function which ...
2
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2answers
62 views
Turning an amortising swaption into a normal swaption
Is there a way to enter a trading strategy in which the notional of the cashflows of an amortising swaption become all the same?
For example, imagine the notional for the first four cashflows of an ...
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2answers
602 views
Put-call parity for cash settled swaptions
The Euro swaption market is changing from cash to physical settlement quotation in July 2018 $-$ see e.g. "Euro swaptions market prepares for pricign revamp (Risk, 2018)". When describing the issues ...
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1answer
179 views
Bermudan Swaptions
Can someone explain, in layman's terms, the mechanics behind Bermudan Swapttions ( without having recourse to pricing models )?
Why are they popular? when are they used ?
How are they hedged i.e ...
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0answers
141 views
The “I want to price swaptions” request
In a small buy-side structure I recently had the following request : "I want to trade swaptions, I need to price them".
After a quick discussion the need is to price vanilla options on fix vs float ...
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0answers
545 views
Black-76 Model for Swaption Price and Greeks
I'm in the early stages of developing a swaption pricing model.
Suppose $t_1$ is the tenor of the swap rate in years, $F$ is the forward rate of the underlying swap, $X$ is the strke rate of the ...
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1answer
173 views
What exactly is the nature of swaption vol data?
Newbie here. I'm curious about underlying nature of the swaptions data on Bloomberg.
Define an arbitrary tenor and expiry swaption time series as
$X$(vol type, currency, reference curve) = [ $x_{...
2
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1answer
301 views
Obtaining swaption prices from lognormal volatility quotes
I am working with the following dataset from quandl: https://www.quandl.com/databases/CSWO (I'm using the sample dataset only). My question is how to obtain the swaption prices from the quotes given. ...
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394 views
What does it mean that a swaption is atm?
This is a relatively short question: If a swaption with option tenor $S$ and swap tenor $T$ is said to be atm, does that mean that the strike of the swaption is equal to the currently (we ar at time $...
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1answer
61 views
Can you determine USD swap rate movement probability from OTM swaption premiums?
E.g., the USD 1y x 4y swap rate is currently 2.84%.
ATM receiver swaption , European exercise is currently at ATM premium of 1.15% while swaption premium at strike 1.5% is 0.15% or about 90% lower ...
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275 views
Change of Numeraire to price European swaptions
In the pricing of a European swaption, it is common to use the annuity factor $A(t)$ as the Numeraire. I was trying to write down the pricing formula via the bank account as numeraire to see if they ...
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247 views
Bermudan Swaption Pricing with Hull/White 1-Factor in Matlab
I want to price a Bermudan swaption, where the option lasts for 10 years and the swap itself for 10 years as well. The option should be exercisable 4 times per year. The following Matlab code is what ...
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2answers
1k views
Cash-settled swaptions
I was wondering, what is the motivation behind the payoff of the cash swaptions being multiplied by the swap annuity?
$$c(S_{\theta, T})=\sum_{i=\theta+1}^{T}\tau_i\frac{1}{{(1+S_{\theta,T}(\theta))}^...
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0answers
936 views
market value of a forward premium swaption
For a cash-settled vanilla interest rate swaption traded with forward premium paid in full at expiry of the option, what should the "mark-to-market" be during the life of the option?
Should it be ...
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2answers
408 views
Accreting swaption
Is there any literature on the maths behind the computation of the price of an accreting swaption in the LMM model (no monte carlo, closed formula or close enough...)?
Thank you!!
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Mortgage hedge (U.K.)
Background:
In the U.K. Residential mortgage market you pay a fixed rate for only part of the term. The fixed rate period would be 0-5 years typically with the term being 25 years. A common approach ...
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3answers
596 views
Receiver Swaption and Callable Bond - Literature Proof?
I'm looking for a formal proof that a receiver swaption is equivalent to a callable bond.
I have only found some CFA Internet pages so far where this statement is considered as proven, tough I haven'...
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1answer
103 views
How to prrice a European swaption with floor?
I'm wondering how we can price a european swaption with a floor on the floating leg.
Assuming that we use the HW 1 factor model, how we can simultaneously calibrate the swaption ( on swap rate ...
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1answer
423 views
Swaption Price with Negative Swap Rate
To price Swaptions, I use the Black '76 model. I'm trying to update the model to handle negative interest rates. One such approach to doing this is detailed here. In particular I'm interested in the "...
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1answer
918 views
Swaption Trading
In most Banks, the Traders are provided with ATM Implied vols across different Swaption Expiry's and different Underlying Swap Maturities.(The ATM Implied Vol Cube)
If the trader wants to trade an ...
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1answer
2k views
Where can I find open swaption implied volatility data?
Anyone have a good place to find interest rate swaption implied volatility data? Does Bloomberg's python API allow access?
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801 views
Swaptions to calculate swap exposure for CVA
I am looking at using the swaption method to calculate the EPE and ENE on a swap over its life, to use in CVA/DVA calculations.
I have a number of questions, how well does this method work in ...
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1answer
558 views
Swaption Corridor Payoff Diagram
What does the payoff diagram look like for a long payer swaption corridor?
For example, suppose that I am looking at a long-payer $1 \times 10$-year swaption with 10Y swaps as the underlying. If I ...
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1answer
260 views
Swaption pricing
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:
...
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0answers
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Volatility Parametrization Libor Market Model - Underspecified Model?
Does the volatility parametrization that I have chosen give an underspecified model? Which volatility parametrization in the Libor Market Model would suit the best for the particular case described ...
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0answers
238 views
Interest rates - Swaptions implied volatility - Volatility anchoring with Black and with normal volatilities
In a LMM+ with displacement factor a volatility anchoring technique is used, i.e. a long term volatility assumptions is applied, derived from historic time series. Should I adjust this historic ...
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0answers
125 views
Estimate the risk of swaptions
I would like to model OTM Swaptions. I can use some implementation of the Bachelier model (not B76 due to negative rates) and implied volatilities from Bloomberg.
For 10Y X 10Y (10 years option ...
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0answers
361 views
Pricing back swaptions corresponding to underlying swaps of Bermudan Swaption in calibrated LMM
I do not know to which swaption volatility matrix I have to calibrate the LMM in order to price back correctly the swaptions corresponding to the underlying swaps of a Bermudan Swaption.
My problem: ...
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2answers
747 views
Pricing Cancelable swap
Consider a first hypothetical, a swap.
Party 1 is paying 6 month Libor, semi-annually.
Party 2. pays $1+3*(\frac{Index_\color{red}{T}}{Index_0}-1) $ only at maturity. Say the notional is 1. $Index_t$ ...
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2answers
2k views
SABR Calibration: Normal vs Log-Normal Market Data
This question is about getting some clarification as to how to understand market quotes for normal & log-normal vols together with certain model assumptions.
So let us define
$C_{BS}(F_0,K,T,\...
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2answers
514 views
Accuracy Rebonato Swaption Approximation Formula among Different Strikes
Can somebody explain me if the Rebonato swaption volatility approximation formula is accurate for only ATM strikes, and if yes why? Can it also be used for ITM and OTM strikes?
My foundings:
Let $0 &...
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1answer
354 views
Why can a swap option be regarded as a type of Bond option?
Why can a swap option be regarded as a type of bond option?
My idea: Suppose the swap rate of the swaption is $s$. Now consider a bond option expiring at $T$ with strike, $(P_K)_t = \dfrac{1}{1+s(T-...
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1answer
477 views
Swaption Volatility Cube arbitrage
How can I exploit an arbitrage by violating the following no-arbitrage condition (taken from the paper "Arbitrage-Free Construction of the Swaption Cube" by Simon Johnson and Bereshad Nonas):
Swptn(K,...
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1answer
1k views
Normal Black-Scholes model for swaptions isn't working properly
I just wrote two functions in Matlab which calculates the swaption prices based on the Lognormal model and on the Normal model, although I have the idea that the Normal model is wrong because the ...
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1answer
1k views
Is there any template of hull white one-factor calibration model?
Recently I would like to look for excel template of hull white one-factor calibration model using swaption data for my urgent task? However, it seems that I cannot find suitable one in the web.
...
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1answer
155 views
Why is there an upper limit on the premium of an ATM (!) call swaption in the Black76 model?
Trying to imply Black76 (where the forward swap rate is log-normal) volatilities as Bloomberg does in their VCUB screen we see holes at two regions:
at short maturities due to negative rates which ...
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1answer
601 views
Libor Market Model Calibration
Currently I am doing a research on the plain vanilla multi-curve framework Libor Market Model meaning that no stochastic volatility is involved. I had the idea to calibrate to the swaption market. In ...
