<t>Dear allhow would you approach valuation of EMU convergence products, that is bets that the local economy (Polish economy in my case) will join or at least converge to the economies of the EMU? Typically the payoffs are contingent on the interest rate difference (e.g. PLNIRS5Y - EURIRS5Y). Would ...

<t>Hiwould you mind providing more details of the second procedure? I understand that it is a non-parametric method with some regularity-preserving conditions. Do you include away-from-the-money caps in the calibration set or do you separate deterministic and stochastic LMM calibration?Best regards ...

Hellowhat is wrong with the analytical formula apart from that it ignores second-order effects?If this is your concern then I would go for a stochastic volatility + displaced diffusion extension of the log-normal model.Best regards - Dunbar

HiI tend to think I'm wrong with my ATM bootstrapping method. I will follow way 1 or 3 instead.Thanks for your help, gc and Clopinette- Dunbar

<t>Hi gclet me explain:I have a cap containing n caplets and price c, a floor containing n floorlets and price f,a cap containing n+1 caplets and price c', a floor containing n+1 floorlets and price f'.I assume that the difference c' - c can be attributed to the last caplet, similarly I assume that ...

<t>Hi gc and Clopinettein fact I believe I need no additional assumptions to bootstrap ATM caps. I only rely on the equalities: cap - floor = FWD IRS and in particular caplet - floorlet = FRA.That's why I choose the FWD IRS rate for caps/floors and FRA rate for caplets/floorlets.Certainly when using...

<t>Hiwhat if only ATM cap quotes are available? Am I correct in thinking that bootstrapping is still possible by using ATM strikes both for caps (where ATM = FWD IRS) and for caplets (where ATM = FRA)?Provided it is correct to bootstrap ATM caps I have the following question: ATM caplet volatilities...

<t>Hi ClopinetteI'm trying to replicate the results of J & R in an attempt to upgrade my implementation of LMM.The starting point is a deterministic sticky-rate volatility model. I first wish to move to time-homogeneity of volatilities, i.e. to sticky-maturity volatilities. Here I encounter a pr...

<t>Hello againnow to correlations: J & R suggest decomposing the covariance matrix at every rate calculation point (on page 16 of their paper "A stochastic volatility, displaced diffusion..."). Why not orthogonalize the correlation matrix once and just rescale the coefficients to match volatilit...

<t>Hello my spiritual leaderssorry to bother you again with the problem of time-homogeneity of forward rate volatilities. Using the Joshi & Rebonato approach (minimizing the time-inhomogeneous part of rate volatility) under no constraints but positive volatilities I get almost zero values from 4...

<t>Helloon second thought... I clearly missed calculator's point as he indicated no problems in bootstrapping caplet volatility from cap prices but I still think the problem has little to do with BGM structure nor does it imply arbitrage. It's just that market data seems to invalidate the assumption...

<r>Dear allI have come across an article by Christian Bluhm on CDO modelling, in which he asserts two things I find difficult to understand.Firstly, he constructs credit spead curves from observed default and rating transition probabilities. He then suspiciously often conditions his statements on th...

I will, provided it appears in free articles. But wouldn't you let me know if it makes any sense what I've written on local volatility? Many thanks - Dunbar

<t>Hiif I may ask - how can a model (here: local volatility) be considered fit for pricing but poor for sensitivity analysis? Why consider the notion of model-implied smile dynamics if smile is an input to the model? Can't we assume some reasonable (eg. sticky-delta) smile behaviour and use it in mo...

<t>Hi againa newbie to CBs as I am I found the Das et al. article "A simple unified model for pricing derivative securities with equity, interest rate and default risk" (2003) most accessible. The authors claim their approach the most advanced published so far. But wouldn't it be more consistent wit...