Posted by
Luigi Ballabio on
Mar 02, 2005; 2:00am
URL: http://quantlib.414.s1.nabble.com/Possible-problem-on-bermuda-swaptions-2-tp3621p3628.html
On 03/01/05 18:25:17, Luca Berardi wrote:
>
> I have probably found the source of mispricing in bermuda
> swaptions. The problem seems to lie in the new implementation of the
> class DiscretizedSwap in QuantLib 0.3.8: in fact the DiscretizedSwap
> now updates itself in the following way:
> - fixed leg: the fixed coupons are added on the payment dates
> - floating leg: the floating coupons are added on the fixing dates.
>
> In QL 0.3.7, instead, the DiscretizedSwap updates both the fixed and
> floating leg on the fixing dates.
[snipped]
> The problem could be easily fixed by letting the fixed leg of the swap
> to be updated on fixing dates, too (which is how things are set in
> QuantLib 0.3.7). This also enables to discard the first payment after
> the exercise date, which was the issue I raised few messages ago.
Luca,
it's not a bug, it's unstated requirements :) When the exercise
date coincides with the coupon dates, the pricing is correct either way.
However: yes, adding fixed coupons at their reset dates could make it
easier to implement the exercise lag. But it would not solve the general
problem. Take a swap paying fixed coupons in March and floating-rate
coupons in March, June, September and December. Make it the underlying of a
swaption with exercise date in September. According to your trader's specs,
the first payment after exercise should be next March; but the current
implementation (even modifying the fixed-coupon management) would include
the floating-rate payment in December. Getting the correct start date for
the underlying swap does require explicit coding.
Later,
Luigi
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