Questions tagged [swaption]
The swaption tag has no usage guidance.
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Floor vs Receiver Swaption with Equal Strike
Let's say we have the following two instruments.
A 5x10 floor (5-year floor, five years forward) with a 4% strike on 1-year SOFR and
A 5 into 5 European receiver swaption (right to enter into a 5-...
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what is the point of SABR model as an interpolation tool if we can already observe the whole vol cube from the market
on BBG and other data providers, it is common that you can find the whole vol surface/cubes. What is the point of the SABR model as an interpolation tool? why cannot people just linear interpolate the ...
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Instrument valuation using Monte Carlo simulation with Quantlib
I am looking for some example to value an American swaption using monte carlo simulation of ...
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When calculating swaption greeks, would annuity need to be considered? [duplicate]
we all know that swaption price = annuity * black price.
The question is that when calculating risks, should we treat annuity as a constant. i.e. is it correct that swaption delta = annuity * black ...
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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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Effect on Forward Swap Rate from a parallel shift in forward curve
Can anything be said on how a parallel shift in the forward curve affects the forward swap curve?
To be more concise, say we have a model estimate of the implied vol for the 2Y-10Y point (2Y ...
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Delta hedge swaption straddle
Let's say you decide to buy a 2Y10Y ATM swaption straddle (i.e. buy 10 million ATM payer swaption and buy 10 million ATM receiver swaption).
In order to delta hedge, I believe you would short the ...
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How is this greek calculation meaningful?
For a swaption, the "Pricing And Hedging Of Swaptions" paper by Akume et al (2003) says:
I get that he's just taking the derivative of the swaption valuation formula (which is N * A * ...
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SABR for swaptions
We calibrate SABR on each expiry and tenor combination using market data. (e.g. 1mx10y, 3mx10y etc.) Then how about the non-standard expiry like 2.5mx10y? Do I linear interpolate the alpha, beta, rou ...
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Backtesting One-Factor HJM model with selling European Receiver Swaption
I am attempting back test the performance of a model - namely the Musiela equation used to model instantaneous forward rates with constant time to maturity:
$$r(t,x)=r(0,x)+\int_0^t\left(\frac{\...
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BLOOMBERG Strike vs Straddle Volatility
In Bloomberg's VCUB, what is the difference between the "strike" volatility and changing this option to "straddle"? It seems like the "straddle" vol should be the same as ...
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A rates model for EUR and USD pricing in different underlyings (EURIBOR (yes) or ESTR, and SOFR)
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 ...
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Practical examples of pricing Mid-Curve Swaptions [duplicate]
Are there any books or papers that run through practical examples of Mid-Curve Swaption pricing, and their liquidity in the market? So I can match the theory to the practical. Thanks.
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Volatility adjustment for SOFR/OIS caplet referencing LIBOR vol
Suppose that today the price of a 3m LIBOR caplet with 6m expiry has been calibrated with a particular implied volatility.
How would one go about thinking about an adjustment to that volatility to ...
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When to exercise a physical Bermudan swaption
I have seen a lot of literature regarding the valuation of physical Bermudan Swaptions.
However, I could not find any answer to the following question: if you're a trader and an expiry date is ...
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Is $N(d_1)$ a good approximation that a swap enters in the money?
I'm looking for an easy method to approximate the probability of the forward swap rate that is implied by the swpation market. One possibility would be to fit a certain model, e.g. SABR, and extract ...
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SabrSwaptionVolCube Class in Quantilib Python
Just noticed after upgrading to the most recent version of Quantlib Python that the class ql.SabrSwaptionVolCube is now available. This is a very useful class in that it behaves in very much the same ...
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Gamma and Theta of a swaption
For a swaption, I had 2 questions:
how would I guage the PnL based on RV vs IV on a swaption?
I'm guessing its 0.5 x gamma x (RV^2-IV^2)(or realized variance - implied variance)
Not 100% sure on ...
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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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Can someone explain to me how volatility/premium works for ATM swaptions? Why are they the same for calls and puts? [duplicate]
I don't understand how Bloomberg quotes ATM swaptions, they just show the same volatility/premium and don't separate calls and puts. Are they the same? How does it tie to normal volatility? Thanks
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How to price PIK (paid-in-kind) coupon bond with option by the borrower to pay cash?
I'm trying to price a PIK coupon with an Embedded Option by the borrower to pay in cash. Without the Embedded Option, it is simply a zero-coupon bond paying Principal*(1 + coupon rate)^n at the end.
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Is it possible to estimate 'future zero curves' using Hull-White 1 factor model?
With regards to the following:
https://www.mathworks.com/help/fininst/price-bermudan-swaptions-with-different-interest-rate-models.html
It seems to me that the HW1 model is used to generate the ...
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Pricing the embedded option in a callable floating rate note
From my understanding, I know that we can decompose a long callable bond into a long vanilla bond and short receiver swaption. However, I do not understand, how could I separate or calculate the ...
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Workaround for Hull-White short rate model in market without swaptions
Every time I search calibration methods in short-rate models such as Hull-White, I always find information on how to do it with swaptions market data. Yet, I can't find anything about how to do it in ...
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How to compute forward swap rates?
I am trying to compute shocks on the forward swap rates based on shocks to the swap rate curve (aiming at repricing consistently a set of swaps and swaptions based on a shock to the swap curve):
It ...
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Expiry of a midcurve swaption
Have a logical question - let me paint a picture.
I have a 1y5y5y Midcurve Payer Swaption, and at Expiry the swaption is ITM (say the 5y5y rate is 4% and my strike is 3%).
then 5 years after expiry (...
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How to interpret the implied vol for swaptions in a bachelier and black model and how forward pricing relates to it
I have two very simple question about the implied volatility of a swaption and how it relates to actual rates level. Suppose we have two famous models, Bachelier and Black. Under either model, the ...
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Carry on a USD 6m10y payer swaption
Trying to calcuate the carry on a 6m10y payer swaption.
So far, I have used: carry = spot rate - libor
Do I use the 6m LIBOR rate (0.15213%)? And do I just use the 10y yield for the spot rate (1.26)?
...
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How to understand wedge?
It is heard that trading wedges (cap/floor straddle - swaption) is actually trading the correlation btw forward rates. How to understand this? Either swaption or cap/floor seem to be insensitive to ...
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How to find volatility of a 1 day option based on 2 day annualized volatility
first time -I'm curious as to how the following would work:
I have a 2 day(only includes full day of Thursday and Friday) swaption with a volatility of 100 bps.
We also know the weights we've assigned ...
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Calibration Problem in the LMM-Skew (Shifted Diffusion) Model
I have implemented the LIBOR market model (LMM) and I am quite satisfied with the results. I have now added a skew to the model as described in 10.1 of Brigo/Mercurio. That is, I have replaced the SDE
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LMM. Calibration to swaptions by Brigo and Morini. Volatility of swaption that matures at T=0
I'm reading Brigo D., Mercurio F. Interest Rate Models - Theory and Practice (Springer, 2006)(ISBN 3540221492) and also a source article on LMM cascade calibration to swaptions by Brigo and Morini.
I ...
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Price 3m libor autocap with LMM calibrated on 1y swaption data
I need to calculate a price of an autocap contract which is
An autocap is similar to a cap, but at most γ ≤ β caplets can be
exercised, and they have to be automatically exercised when in the
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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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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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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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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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Reconciling different specifications of drifts in the LMM
I've been going through the book "Fixed Income Securities" by Bruce Tuckman which gives the following definitions of the drift terms (after showing it for a specific example with 3 forward ...
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Why are LMM+ parameters becoming more unstable when using an inverted volatility term structure
I have an implementation of an LMM+ model (a shifted Libor Market Model with rebonato volatility function) and am seeing recently that the calibrated parameters are becoming more unstable over time; I ...
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Pricing Swaption Analytically using Libor Market Model
I was asked the following question in a recent interview: "(i) Express a forward swap rate in terms of forward Libor rates. (ii) Apply Ito's lemma to this expression to derive the process for the ...
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Call probability of a callable swap
For one call date,
The call probability is just the probability that the swap rate for the remaining life of the swap is below the strike rate. This is easily obtainable in a normal vol model, it is :
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Call Probability of European callable IRS [closed]
When pricing a callable IRS (say only one call date) with a diffusion model (e.g. HW 1F) with a Montecarlo resolution, one can get the call probability on the call date versus maturing the date (which ...
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Bermudan Swaptions [closed]
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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Validity of Bermudan Swaption's Price/Greeks
I'm implementing a lot of stochastic models on my own for fun and I'm quite puzzled about the usual procedure concerning the correctnes of Bermudan swaptions prices and greeks ? How can you tell that ...
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From Implied volatility to shifted Black volatility
I don't know who to go from normal to shifted black volatility before calibrating SABR with negative interest rates.
I see: "As we know that implied volatilities have a one-to-one relationship
...
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Question about swaption premium quote on the bloomberg terminal
This is my first question here and I hope that my question is appropriate.
I have some data about swaptions that are from the bloomberg terminal and basically I am performing a risk-neutral ...
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Use the put-call parity to get the implied swap rate of a YoYIIS cap(floor)
Solved
As pointed by @dm63 in the comments, the implied swap rate can be derived by solving the caplet (floorlet) formula for the the interest rate, where you set the formula equal to the Swap NPV (...
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Swaption risk bucketing
In the IR swaption market, we have 24Expire10Tenor instruments(like a 2410 Matrix).
Now I have the Vega number for each instrument, and I want to reduce the matrix size with the same total vega risk.
...
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Swaption Terminology
What does 5y10y200 WC mean?
Further, what does 2y10y WS mean?
I know the first digit (5 or 2) means that the swaption starts in 5 or 2 years time, and the second digit shows how long the exchange ...
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Swaption trade data elements
Can someone please list all the
Swaption trade data elements.
I am doing research and trying to ensure I document all key data elements of a Swaption trade.
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