Re: [Quantlib-dev] SABR/CMS/Vol Interpolation...

[Toyin A. <toy...@ho...>]

Hi,

My observations concerning point 2) is invalid as I have now associated it 
with equ 2.12

Toy out.


>From: "Toyin Akin" <toy...@ho...>
>To: qua...@li...
>Subject: [Quantlib-dev] SABR/CMS/Vol Interpolation...
>Date: Mon, 24 Jul 2006 11:17:33 +0100
>
>
>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...
>
>
>
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