14
votes
Forward implied volatility
From an equities perspective, there are two concepts that should not be confused in my opinion and context should make the distinction self-explicit:
Forward variance swap volatility (A)
Forward ...
- 14.7k
11
votes
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Volatility adjustment for SOFR/OIS caplet referencing LIBOR vol
I will refer to Risk-Free Rates (RFR) for greater generality, instead of OIS or SOFR. There are two dimensions to your question, I will treat them separately.
How to adjust a LIBOR vol surface to ...
- 8,169
8
votes
Forward implied volatility
It is possible, yes, but it requires assumptions. But, philosophically speaking, this is the case as with all pricing, of any instrument. For example, given only the price of a 6Y and 7Y IRS can you ...
- 11.2k
8
votes
What are "greeks" in general for non-standard options (swaptions, capfloors, etc)
Practically, few things in real life have convenient closed-form calculations.
Instead, you price some exotic, then you bump the various inputs, one or several at a time, up and down, by various small ...
- 12.6k
7
votes
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1y10y vs. 10y1y Swaption
Currently the USD 10Y swaprate is $2.93 \%$ and the ATMF 1Yx10Y implied volatility (relative) is $22.5 \%$ which corresponds to the Black model (absolute) volatility of about $4.15$ bp/day. The 1Y ...
- 3,700
7
votes
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SABR Calibration: Normal vs Log-Normal Market Data
I think you did something wrong in translating the input to numerics. As pointed out by dm63 normal vols are quoted in basis points.
Using equation A.67a) from the Hagan paper you linked we see (...
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7
votes
CMS Pricing - Convexity Adjustment by Replication
The CMS represents the value of a swap rate for any point in time, i.e. we are interested in extrapolating the density of the swap rate in a similar way as the IBOR rate.
Let us start with the fair ...
- 1,012
7
votes
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Trading desk assumes zero percent discount rate?
If they were a bank, or insurer, utility etc, then some regulator would likely encourage them do everything that others do, whether they like it or not, or whether it makes any sense. But if no ...
- 12.6k
7
votes
Bermudan Swaptions - Payer vs. Receiver (LGM)
I’m guessing you are finding that your model overvalues Bermudan receiver options and probably undervalues Bermudan payer options. The rationale for this has more to do with supply and demand than ...
- 17.5k
6
votes
Where can I find open swaption implied volatility data?
CME publishes its volatility surface daily on their FTP: CME Vol Surface.
Unfortunately I know of no open APIs that would get you historical data. I'd recommend looking at Barclays Live or Morgan ...
- 11.8k
6
votes
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Swaption Trading
At most banks, swaption traders have models that allow non atm volatilities to be controlled by two parameters. Specifically , a parameter to control the smile (richness of out of the money options) ...
- 17.5k
6
votes
Cash-settled swaptions
The advantage of cash-settled swaptions is that the payoff only depends on one variable: the corresponding swap rate which is directly observable in the market:
$$
\mathrm{Payoff}(T) = f(S_T) = A^{\...
- 3,946
6
votes
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How to compute forward swap rates?
To find a (forward starting) swap rate given discounting and projection curves, e.g. bootstrapped GBP SONIA discounting curve and GBP LIBOR-3M projection curve, you basically have to vary the coupon ...
- 7,035
6
votes
What are "greeks" in general for non-standard options (swaptions, capfloors, etc)
If the question is how one defines Greeks for interest rate options, then it is a relatively straightforward extension of the concept from the basic idea for say equity options. They are defined as ...
- 940
6
votes
Free Arbitrage conditions in ATM swaption surfaces
There are no no-arbitrage conditions on ATM vols of swaptions with different expiries/tenors, because the underlying swaps forward rates are different instruments. There are conditions however for ...
- 5,692
6
votes
BLOOMBERG Strike vs Straddle Volatility
Generally, best to ask the help desk (F1F1) for simple questions like this.
See help VCUB {LPHP VCUB:0:1 2824936 <GO>}:
Cube Options: Allow you to display or ...
- 9,349
5
votes
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Put-call parity for cash settled swaptions
The market standard formula approximation for cash settled swaptions applies Black/shifted Black/Bachelier around the forward swap rate so that with this formula parity between payer and receiver ...
- 5,692
5
votes
Mid-curve swaption
You can only infer forward vol by pairing a mid-curve option with a spot option. It's easier to go through an example (I'll use 5y x 5y vol since I have the sketch below handy...) One decomposition of ...
- 11.8k
5
votes
Forward implied volatility
The procedure outlined by @attack68 is correct for estimating forward vol assuming you are in a world where volatility is deterministic and uncorrelated with the underlying. If these assumptions are ...
- 17.5k
5
votes
Swaptions Gamma Interview Questions
Using Taylor polynomials of 2nd order:$$V(r+h)\approx V(r) + \frac{\partial{V}}{\partial{r}}h +\frac{1}{2}\frac{\partial^2{V}}{\partial{r}^2}h^2$$
$$V(r-h)\approx V(r) - \frac{\partial{V}}{\partial{r}}...
- 283
5
votes
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What is upper left vol?
In swaptions, there is the expiration of the swaption into an underlying swap. When the dealers provide the vol surface, in the first column, they typically put the expiry of the swaption from ...
- 6,652
5
votes
Trading desk assumes zero percent discount rate?
In a past life, I was an equity strategist at a sell-side bulge bracket firm. In 2008 (obviously) the bank decided to take a long hard look at the funding costs of its derivatives books. So they ...
- 5,101
5
votes
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What is the definition of "co-terminal swaptions"? why they are important in the calibration process?
This question has partially already been answered here.
Let's do a simple example to illustrate the idea though. Take a 5y Bermudan callable S/A USD bond. How would you reconstruct the multi-call ...
- 1,906
5
votes
Question about swaption premium quote on the bloomberg terminal
EUSP0101 Curncy DES
Style is Straddle (like almost all premium quoted swaptions - and ATM FX options for example, although the latter is quoted in VOL), thus the quoted premium is the sum of payer ...
- 9,349
5
votes
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How to understand wedge?
A ‘wedge’ as understood by interest rate options traders is a structure of the form : long a cap/floor straddle struck ATM for a period of 1 yr starting in N years / short a N year into 1 year ...
- 17.5k
4
votes
Swaption annuity factor
To build intuition, let us consider the underlying swap itself rather than a swaption.
Conceptually, you can think of the swap annuity factor as the present value of gaining 1 unit every period of ...
- 714
4
votes
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Swaption valuation across time using vcub
Forget for a moment that your option is delivering the immediate entrance in a swap (if the swaption is physically settled) or the cash amount of the swap (if the swaption is cash-settled), as your ...
- 1,223
4
votes
European Swaption Pricing Using Normal volatilities
The formula for pricing a swaption under normal volatility is simply the Bachelier formula. It may be found in many papers (for example, Le Floc'h Fast and accurate basis point volatility), and is ...
- 1,444
4
votes
Which measure is used to price a swap?
I want to propose a different answer here. I think mathematical expectation (under any measure) is not used in valuing an interest swap.
Years ago I used to explain swaps to beginners by speaking in ...
- 11.6k
4
votes
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QuantLib Swaption Vol Cube
The swaption vol cube is basically a series of surface layers, each layer refers to a given strike and has vols for combinations of option expiries and swap tenors of the same underlying: a swap with ...
- 5,835
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