Re: [Quantlib-users] Qurious finding in ORE code

[Peter C. <pca...@gm...>]

Thanks Ioannis!

OvernightIndexedCoupon is always backward looking. We model forward
looking term rates using the TermRateIndex class (derived from
IborIndex) such as in SofrTerm in conjunction with e.g. IborCoupon or
other IborIndex - based classes.

Does that make sense?

On Fri, 6 Jan 2023 at 18:22, Ioannis Rigopoulos <qua...@de...> wrote:
>
> Hi Peter,
>
> Yes. This now makes sense. I was not aware of this formula. Thank you
> for sharing the paper as it helped me understand the details of
> overnight index cap/floor pricing.
>
> Thanks to ORE, I completed a sofr cap pricing for a client and
> everything went very smoothly. So, kudos for the excellent work! I do
> mention of course that the analytics come from ORE/Acadia.
>
> Just parenthetically, I noticed that the
> QuantExt::OvernightIndexedCoupon does not distinguish between forward
> and backward looking term rates, which is fine for linear contracts, but
> not so for caps or swaptions because a backward looking rate exhibits
> higher variance than its forward looking counterpart. Your formulas
> imply that you treat the OvernightIndexedCoupon as if it were backward
> looking. I would be curious to know if you plan to add a corresponding
> boolean flag in the OvernightIndexedCoupon constructor and adjust the
> vol code discussed here to account for both forward and backward looking
> cases.
>
> Ioannis
>
> On 1/5/2023 10:38 AM, Peter Caspers wrote:
> > Hi Ioannis
> >
> > this is a typo, the line should actually be
> >
> >              T += std::pow(fixingEndTime - T, 3.0) /
> > std::pow(fixingEndTime - fixingStartTime, 2.0) / 3.0;
> >
> > This corresponds to the formula for v_j^B at the end of section 6.3 in
> > https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3330240.
> >
> > We will fix this shortly.
> >
> > Thank you
> > Peter
> >
> > On Wed, 4 Jan 2023 at 19:13, Ioannis Rigopoulos <qua...@de...> wrote:
> >> Does anyone have a clue on why the statement (found in
> >> blackovernightindexedcouponpricer.cpp)
> >>
> >> T += std::pow(fixingEndTime - T, 3.0) / std::pow(fixingEndTime - T, 2.0)
> >> / 3.0;
> >>
> >> is not coded much more simply as
> >>
> >> T +=( fixingEndTime - T ) / 3.0;
> >>
> >> The two variables T and fixingEndTime  are both double.
> >>
> >> I am only asking in case there is some sort of sophisticated trick that
> >> I am missing.
> >>
> >> Ioannis
> >>
> >>
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