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Re: swaption surface

Posted by Peter Caspers-4 on Mar 27, 2015; 7:38am
URL: http://quantlib.414.s1.nabble.com/swaption-surface-tp16362p16411.html

Hi Pierre,

this is a default implementation, giving the lowest possible strike
(zero - the library is currently still limited to lognormal
volatilities with regards to swaptions) and a "resonable upper bound"
of 100% = 1.0. However you can always enable extrapolation for a cube
by

myCube->enableExtrapolation();

or say "extrapolate = yes" when asking for a single volatility outside
this strike range.

With regards to quotation style, yes, the volatility cubes expect an
ATM volatility and smile volatility quotes in absolute moneyness ( K -
F ) scale. Typically you have quotes for

ATM-200bp, ATM-150bp, ATM -100bp, ATM-50bp, ATM-25bp, ATM, ATM+25bp,
ATM+50bp, ATM+100bp, ATM+150bp, ATM+200bp

or the like. You would specify this in QuantLib via the strikeSpreads
parameter with

{-0.02, -0.0150, -0.01, -0.0050, -0.0025, 0.0, 0.0025, 0.0050, 0.01,
0.015, 0.02}

You have to be careful with the quotes that are not given due to the
low rates on the receiver side. The linearly interpolated cube will
just blindly interpolate what you pass, so probably you should
extrapolate the quotes flat to the left (for example) before you hand
them into the constructor. The SABR cube ignores quotes below a cutoff
strike given by a parameter in the constructor, which defaults to 1bp.
I guess we should invest some work, so that we can process invalid (=
empty) quotes passed to the cubes in the future. Besides I am
currently working on shifted lognormal cubes.

What do think of normal swaption cubes. Are they also relevant ?

best regards
Peter


On 26 March 2015 at 22:07, Grison PG Pierre (External DEXIA-US)
<[hidden email]> wrote:

> Hello,
>
> Do you know if there is a reason for:
>
> Rate minStrike() const { return 0.0; }
> Rate maxStrike() const { return 1.0; }
>
> I have the feeling the strikes are expressed as spreads from the spot swap rate but I should be wrong. If have strikes such as -3bps (real strike = spot rate -3bps), -2bps, ..., +3bps and so on, should I convert them before using quantlib?
>
> Pierre
>
>
>
>
> -----Original Message-----
> From: Peter Caspers [mailto:[hidden email]]
> Sent: Friday, March 13, 2015 10:43 AM
> To: Grison PG Pierre (External DEXIA-US)
> Cc: [hidden email]
> Subject: Re: [Quantlib-users] swaption surface
>
> Hi Pierre,
>
> SwaptionVolCube1 (SABR) and SwaptionVolCube2 (linearly interpolated) are the available choices in the production branch, both located in ql / termstructures / volatility / swaption
>
> Best regards
> Peter
>
>
> On 13 March 2015 at 15:28, Grison PG Pierre (External DEXIA-US) <[hidden email]> wrote:
>> Hello all,
>>
>>
>>
>> What is the best way in QuantLib to define, for a given tenor, a
>> swaption volatility surface such as vol=f(maturity,strike) ?
>>
>>
>>
>> Many thanks,
>>
>>
>>
>> Pierre
>>
>>
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Dive into the World of Parallel Programming The Go Parallel Website, sponsored
by Intel and developed in partnership with Slashdot Media, is your hub for all
things parallel software development, from weekly thought leadership blogs to
news, videos, case studies, tutorials and more. Take a look and join the
conversation now. http://goparallel.sourceforge.net/
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