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mtsm
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Posts: 351
Joined: July 28th, 2010, 1:40 pm

swaption implied vol under CSA discounting

July 23rd, 2018, 3:47 pm

What is the current market practice on the dealer side for quoted european swaption premiums or implied volatilities under various CSA discounting schemes. 

Specifically, in terms of the underlying swap. In my understanding the market standard is to assume that the underlying swap is based on local currency discounting. 

But let's assume the case of a european swaption in EUR with everything collateralized in USD. So the swaption premium is collateralized by posting USD collateral. Moreover it is assumed that the underlying swap is to be collateralized by USD collateral. I wonder what the impact on premium and implied vol is in that case?

Is there a standard approach to handle this case? Do dealers mark separate vols for this? How?

Thanks
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Re: swaption implied vol under CSA discounting

July 23rd, 2018, 8:57 pm

I’ve never heard of a dealer pricing smth like that in this day and age.  It would be a very unconventional derivative, as far as I can ascertain.
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