Skip to main content
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 ...
Quantuple's user avatar
  • 14.7k
11 votes
Accepted

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 ...
Daneel Olivaw's user avatar
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 ...
Attack68's user avatar
  • 10.5k
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 ...
Dimitri Vulis's user avatar
7 votes
Accepted

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 (...
math's user avatar
  • 1,738
7 votes
Accepted

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 ...
RRL's user avatar
  • 3,690
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 ...
FunnyBuzer's user avatar
  • 1,012
7 votes
Accepted

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 ...
Dimitri Vulis's user avatar
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 ...
dm63's user avatar
  • 17.2k
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^{\...
AFK's user avatar
  • 3,936
6 votes
Accepted

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) ...
dm63's user avatar
  • 17.2k
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 ...
Helin's user avatar
  • 11.7k
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 ...
piterbarg's user avatar
  • 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 ...
Antoine Conze's user avatar
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 ...
AKdemy's user avatar
  • 8,989
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 ...
Helin's user avatar
  • 11.7k
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 ...
dm63's user avatar
  • 17.2k
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}}...
MaPy's user avatar
  • 283
5 votes
Accepted

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 ...
AlRacoon's user avatar
  • 6,632
5 votes
Accepted

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 ...
Kermittfrog's user avatar
  • 6,683
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 ...
demully's user avatar
  • 5,071
5 votes
Accepted

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 ...
oronimbus's user avatar
  • 1,896
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 ...
AKdemy's user avatar
  • 8,989
5 votes
Accepted

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 ...
dm63's user avatar
  • 17.2k
4 votes

Libor Market Model Calibration

Market practitioners do the following: Correlation is calibrated most often by looking at historical correlations between liquid par swap rate pairs. One could look at implied correlations within ...
dm63's user avatar
  • 17.2k
4 votes

Accuracy Rebonato Swaption Approximation Formula among Different Strikes

it certainly works best at the money. Why? I think it comes from the fact that Black's formula is approximately linear at the money. The approximation $$ \frac{1}{\sqrt{2\pi}} \operatorname{SR} \...
Mark Joshi's user avatar
  • 6,973
4 votes
Accepted

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 ...
Antoine Conze's user avatar
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 ...
AdB's user avatar
  • 714
4 votes
Accepted

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 ...
Olórin's user avatar
  • 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 ...
jherek's user avatar
  • 1,414

Only top scored, non community-wiki answers of a minimum length are eligible