Thanks again Chris,
I got another question on inflation.
I am looking at the file inflationvolatility.cpp in
the testsuite and I don’t get what sort of cap and floor prices are used.
Maybe there is some convention I am not aware of.
Looking on BBG quotes are in basis points from the
order of tenths of bps to some hundredths of bps.
For example looking at price of zero floors on BBG
quotes are from 68 bps up to 446 bps, so I expect to see prices in a range from
0.0068 up to 0.0446, but in the Quantlib inflationvolatility.cpp I see 0.851,
2.236, 3.935, 7.885, 17.92 and 47.625.
OK, prices are from different days, but magnitude has
no sense for me. What did I miss?
Regards,
Ivan
From:
Chris Kenyon [mailto:[hidden email]]
Sent: Wednesday, November 18, 2009
5:29 PM
To:
Subject: Re: Why inflation zero
floor prices to zero
Hi Ivan,
your observations are exactly correct:
1) in a Black world a zero floor has no value because you can't get
there. A YoYInflationBlackCapFloorEngine
implements this so, yes, you always get zero NPV.
2) If you use a displaced diffusion then, yes, you can see value in a zero
floor. This is implemented in the <a
href="file:///\\Users\ckenyon\C++Libraries\QuantLib-SF-99\Docs\html\class_quant_lib_1_1_unit_displaced_black_yo_y_inflation_coupon_pricer.html">UnitDisplacedBlackYoYInflationCouponPricer
for coupons and there is an analogous engine for instruments.
3) Alternatively you can use a Normal process and use the <a
href="file:///\\Users\ckenyon\C++Libraries\QuantLib-SF-99\Docs\html\class_quant_lib_1_1_bachelier_yo_y_inflation_coupon_pricer.html">BachelierYoYInflationCouponPricer
for coupons (or the instrument one) and you will again see value in a zero
floor.
Either way MAKE VERY SURE that you have the correct yoy inflation volatility
for the pricing engine! Don't use a Black vol in a UnitDisplaced
pricer/engine or you will have incorrect results. If you are starting
from cap/floor prices on BBG (or wherever) you have to strip with the same type
of pricer that you then price with. Of course, there is a smile in the
market data on BBG :-) so ...
Usual disclaimers apply.
Best,
Chris
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