Re: [Quantlib-users] Option-market-implied probabilities for interest rate moves

[Michael (D. portal) <mi...@da...>]

Thanks a lot!

I see links like below Breeden-Litzenberger

https://quant.stackexchange.com/questions/29524/breeden-litzenberger-formula-for-risk-neutral-densities

This is very useful for B-S distributional assumptions and will work well
for stocks. I am not sure if it will produce good results for interest
rates which have different distributions (e.g. rates now are so low that
are less likely to decrease than increase). But I will definitely give it a
try. Another way to do this is to use SABR volatility model (which is
specific for rates) but I am not sure if a simple solution exists to derive
probabilities there.

Thanks,

Michael

On Mon, Aug 30, 2021, 11:36 AM Giuseppe Trapani <tr...@gm...> wrote:

> Hi Michael,
>
> to add on the previous answer, the derivative is taken with respect to the
> strike price of the option.
>
> It's pretty easy to derive by yourself starting from the general payoff of
> an option (yielding a "model free result") or from the Black-76 formula.
>
> For extra directions check online "Breeden-Litzenberger result".
>
> Giuseppe Trapani
>
> Il lun 30 ago 2021, 15:28 Michael (DataDriven portal) <
> mi...@da...> ha scritto:
>
>> Yes. Thanks! If you could point me in the right direction on where I can
>> get code for this that would be great.
>>
>> Thanks
>>
>> On Mon, Aug 30, 2021, 8:47 AM Gorazd Brumen <gor...@gm...>
>> wrote:
>>
>>> There is a well known formula that relates call/put prices to implied
>>> pricing probabilities, related to the second derivative of the
>>> call/put prices. You might need an implied option value
>>> parametrization for that.
>>> Regards,
>>> G
>>>
>>> On Sun, Aug 29, 2021 at 5:56 PM Michael (DataDriven portal)
>>> <mi...@da...> wrote:
>>> >
>>> > Hi All,
>>> >
>>> > I am looking for an algo to calculate option-market-implied
>>> probabilities of interest rates moves derived from the premiums of interest
>>> rate swaptions.
>>> >
>>> > E.g. market-implied probabilities from the prices of swaptions on
>>> 10-year-swap rates. What is the market-implied probability that 10Y swap
>>> rate will increase 25, 50, 75 bps, etc?
>>> >
>>> > Thanks,
>>> >
>>> > Michael
>>> >
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