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capstripper test-suite

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Hoffmann, Dr. Laurent

capstripper test-suite

Dear all,

I am currently looking at the capstripper in QL test-suite. Regarding the tests performed on the capstripper I would like to know if there is a particular reason why the matrix the capstripper is tested on does not include ATM strikes. Furthermore the capstripper header includes two more test cases. Will these test cases be included in the future? At last, please allow me to remark that it would also be very helpful to include a test case of pricing a cap using the capstripper.

Many thanks in advance.

Best regards,

Laurent

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DU VIGNAUD DE VILLEFORT FRANCOIS GASAPRD PHI

Re: capstripper test-suite

Hi Laurent,

We do not include the ATM values in the volatility matrix because we haven’t found a sensible to way to use it. The algorithm we have implemented can be sketched as follow:

For each strike we start by assuming that the first stripped volatility is equal to the first implied volatility. Then we price the following cap using this value for the caplets which correspond to the first part. We deduce the price of the rest of the cap and we compute the corresponding implied volatility. Here is an example of the values you can expect:

Ex: 1Y cap 12% -> iv = 12%

2Y cap 14% -> iv = 14.5%

3Y cap 13% -> iv = 11%

In more complex settings we use volatilities given by futures options as starting point. ( in this case the CapStripper is used with an HybridCapletVolatilityStructure).

As for the unimplemented functions declared in the header file I have just removed them and put a comment instead. (One of them was redundant with other tests and the other should be implemented later on). We are actually pricing caps during tests (in the highPrecisionTest for example) though I agree that it is not the most simple use case we can imagine. Maybe a good way to get used to these stuffs is to use the Object Wizard in QuantLibLXL (which I have just rewritten by the way ;-)

Regards,

François

-----Original Message-----
From: [hidden email] [mailto:[hidden email]] On Behalf Of Hoffmann, Dr. Laurent
Sent: martedì 27 marzo 2007 09.35
To: [hidden email]
Subject: [Quantlib-users] capstripper test-suite

Dear all,

Many thanks in advance.

Best regards,

Laurent