From: Toyin A. <toy...@ho...> - 2006-07-24 10:18:29
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Hi all, I have a few questions for you... 1) Volatility interpolation... Let's assume that one has built a volatility smile based on linear interpolation or a calibrated SABR curve and these volatilities are based on 5Y A/MM underlying swap rates. Now some annoying dude comes along and wants to price a swaption based on 5Y S/BB swaps. However only 5Y A/MM vols are quoted in the market. How does one go about adjusting the 5Y S/BB strike rate to that of the 5Y A/MM strike so that an interpolation can be used? Is this enough? Does one need to modify the interpolated volatility also? Or do I tell the dude "we can't price it"!!! :-) 2) Concerning the 'unfinished' CMS convexity adjustment class via replication. Looking at the code (line #235 of the conundrumpricer.cpp class.). Shouldn't this be x - forward (rather than x - strike)? 3) Also based on the 'unfinished' CMS convexity adjustment class, I noticed that the integration limit for CAPs is set to 1.0 (the strike value will move from the given value all the way up to 1.0). If I am reading this right and one uses a SABR model with mid to high-ish wing values, you can imply volatility values over 100% during the replication!! Is it enough to instead compute some percentage movement from the given strike (ie - 40%)? The same is true for the downward direction. That's all folks... Toy out... |