Posted by
Luca Berardi on
Feb 24, 2005; 6:07am
URL: http://quantlib.414.s1.nabble.com/Possible-problem-on-bermuda-swaptions-2-tp3621p3631.html
Luigi, thanks for the mail. I had quick look at the patch and have
some comments:
1) you are silently assuming that exercise dates coincide with payment
dates of the underlying swap. Of course there might be some
de-synchronization due to dates adjustment as you pointed out, but
still it's not possible to deal with cases where the exercise dates
are quite different from the swap's payment dates. The trader I
talked to, told me that usually exercise dates are ten (business)
days before the payment dates of the underlying swap, and with the
adjustment carried out through the new adjust() method you cannot take
into account such a long temporal shift. Of course it could be
possible to extend the adjustment for a period longer than a week,
but then you get a mispricing due to moving payment dates to
exercise dates. In general it would be nice not to require that
exercise dates must "roughly" coincide with the dates in the
underlying swap's schedule.
2) It's ok to shift backwards the payment dates of the fixed leg to
match the exercise dates, but why do you need to shift the fixing
dates of the floating leg forward (again to match the nearest
exercise date)?
Ciao,
Luca.
-----Messaggio originale-----
Da: Luigi Ballabio [mailto:
[hidden email]]
Inviato: giovedì 24 febbraio 2005 12:18
A: Luca Berardi
Cc:
[hidden email]
Oggetto: [Quantlib-users] Bermudan swaption patch (was Re: Possible
problem on bermudaswaptions)
On 02/24/05 11:52:05, Luca Berardi wrote:
>
> >Instead, the problem in the new release seems to be some date
> >synchronization: namely, due to date adjustment it may happens that an
> >exercise date is one or two days earlier than a fixed-coupon payment.
>
> This is an extremely interesting issue, and I had the chance to
> discuss it thoroughly with a trader recently. He explained to me that
> the very successive cashflow of the underlying swap after the exercise
> date should NEVER be considered in the bermuda swaption pricing.
Yes, that is the correct behavior. The following patch (tested on the
BermudanSwaption example, which did give different results in 0.3.7 and
0.3.8---somehow this escaped testing) should fix this; you can try and
apply it to the QuantLib 0.3.8 sources to see if you get the correct
figures.
Later,
Luigi
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