<t>Ok, I think I have misunderstood the meaning of a "vega hedge". I thought is was about the model-specific volatility risk but now I talked to someone and was told it is computed by shifting the implied volatility surface, recalibrating the model to the new volatility surface and repricing the pro...

This depends on the models. Many models have closed form solutions for the pricing of caps/floors. Some models require numerical pricing.For the models you named, please check out Brigo's and Mercurio's book "Interest Rate Models".

<t>Hi,I am wondering about the following:Say I am using a forward rate model:[$]df_i(t)/f_i(t) = \mu_i(t)dt + \sigma_i(t)dW_i(t), \quad i = 1, ..., 10[$]with stochastic volatilities[$]d\sigma_i(t)/\sigma_i = \mu_i^\sigma(t)dt + \nu_i(t)dZ_i(t), \quad i = 1, ..., 10.[$]Now I want to vega hedge a swap...

<t>I need to ask one more question:Say I wish to hedge a 2Y->5Y swaption (within a simulation), and say - for simplicity's sake - I am using a libor market model with a tenor structure of T = 0.0, 1.0, ..., 10.0, i.e. I have 9 stochastic 1-year forward rates (1->2, 2->3, ..., 9->10), i.e. a 9-factor...

<t>I want to test the hedging performance of several term structure models. I have daily swaption and swap rate market data over a period of five years.I thought of the following very simple experiment:On the date of a swaption's inception construct a portfolio which is delta-neutral according to th...

<t>Hi,I have a question with regard to a forward rate based model (like the Libor Market Model). Say at time 0 I know the entire term structure and thus the forward rates[$]f(0, 0, T_1), f(0, T_1, T_2), ..., f(0, T_N, T_{N+1})[$]where the first forward rate has just expired. A forward rate model def...

<t>Thank you. This is a purely academic exercise. My goal is to take various term structure models and let them compete for the best delta and delta + vega hedge within a simulation that evolves forward rates and the swaption implied volatility surface under the physical measure. What has been done ...

<t>Thank you very much for your quick response. The thing is, I am a little confused with one thing in my project. A short while ago I had a correspondence with a well-known author in the field. He suggested I analyze a specific barrier option which can be priced using a static replication approach....

<t>Hi,I am testing the hedging performance of several term structure models in a simulation that generates evolutions of swaption implied volatilities and forward rates under the physical measure.I was wondering the following: Can I analyze the delta hedging performance of my models with regard to a...

<t>I am constructing a hedging experiment within a simulation that generates evolutions of forward rates as well as the caplet and swaption implied volatility surfaces under the physical measure.I am currently looking for interesting derivatives that I can analyze in this synthetic world. In particu...

<t>I have historical swaption market data which is given in the terms of SABR parameters calibrated to the swaption implied volatility smile given on the particular date.In particular (among other tenors) I have SABR data for the swaptions[$]1Y\rightarrow 1Y[$][$]2Y\rightarrow 1Y[$][$]5Y\rightarrow ...

<t>Thank you for your response. This is a relatively long project I am doing for a thesis and I have considered all these aspects.Basically, I am doing a different hedging experiment but as a preliminary test I wanted to test my formulas with historical data.All models are calibrated daily to the ma...

<t>I am currently trying to assess the hedging Performance of various term structure models. I am skeptical of my methodology (this is just a simplified preliminary test). I would appreaciate it very much if someone could take a quick glance at it.Consider this simple hedging strategy:Try to delta h...

Thank you!

<t>I apologize in advance for my very simple question but I seem to be unable to wrap my head around this for some reason.Let P(t, T) the time t price of a pure discount bond paying $1 at time T. Assume that interest rates remain constant over time, i.e. at time t = 1 the bond P(1, 2) will be worth ...