Can anybody tell me which implications the new "multiple curve world" has for FX forwards and FX options?Is it as simple as choosing the right discount curve (e.g. OIS curve or funding curve), i.e. just a question of how to discount correctly?Or is it more complicated...Thanks in advance.

<t>Hi there,I'm working on the JY-inflation model as described in Mercurios inflation paper Mercurio's paper.In order to get prices for caplets and floorlets one has to calculate the variance of . There is a formula for the variance in Mercurios paper, page 15.To my mind, this expression should be p...

<t>Thank you, Church and Martinghoul!Now I'm reading the paper by Dodgson and Kainth, which I find is very well written.I have a small problem with a remark that they made to the convexity correction formula:Dodgson and Kainth say "As the correlation parameter tends to be positive, we see that this ...

<t>Hi there,I've got two questions on inflation modelling:1.) Market Data comes from ICAP, i.e. break even rates (zero coupon) and cap/floor (YoY) prices.Using the break even rates it's possible to derive approximations for the YoY rates by neglecting convexity adjustments. On the other side, one ca...

Thanks for your helpful remarks!

<t>In order to calculate the bucket wise sensitivities of an arbitrary derivative one has to blip the inputs of the yield curve construction process (i.e. bootstrapping) and recalculate the price of the derivative again. I'd like to know if there is an easier way to get those sensitivities without p...

<t>Today, derivatives pricing requires (at least) two curves - one estimation curve and one discount curve. I'd like to know how to make term structure models compatible with this two-curves-setup.Is it really necessary to extend the "classic" interest rate models like HW or LMM to the multi-curve c...

<t>I need to evaluate the following contract: the issuer pays a fixed rate on a predefined basis and the investor in turn pays 3M-LIBOR. Now, here the hard part: during the lifetime of the contract (~ 7Y) the investor has always the right to switch his payments to whatever LIBOR-curve he prefers, i....

<t>QuoteI think, this is also the spirit of the paper. SABR does not work at the moment, because adjustments explode (in my experiments at least). Also, for far OTM strikes it is not easy to compute SABR vols. I don't understand why adjustments should explode. And I don't see any difficulties calcul...

<r>QuoteCan you describe in more detail, how and with what smile you price cms swaps?I use SABR for the "whole" smile. The replication is done à la Hagan (<URL url="http://www.wilmott.com/pdfs/050118_hagan.pdf">http://www.wilmott.com/pdfs/050118_hagan.pdf</URL>). Here I take the upper strike limit a...

Thanks, dicesare!

<t>Thanks a lot, dicesare. I've got a question concerning the condition you stated: in my opinion Put(K=0) = 0 and Put(K=F) > 0 and Digital(K=F)xF > 0. That would mean that the inequation is always fulfilled...Where am I wrong?Thank you, too, Peter. For what it's worth, I don't think it's always pos...

<t>Thanks for your information. Did you also observe the problem at the left wing for low strikes and large maturities (i.e. that K_ has to be moved very close to F)? Do you obtain a valid Cumulative Distribution Function?Is the choice of the core intervals up to the traders ?What's a reasonable cho...

<r>Problem for long maturities is that in order to get an acceptable Cumulative Distribution Function the left border K_ has to be moved very close to the forward F and sometimes it actually has to be chosen greater than F. And if K_ > F than the the smile behaviour around F isn't captured correctly...

<r>I'm looking for a smile model which allows for a good fit to the market smile and which features a proper probability distribution. Btw, I'm working in fixed income. Today I use the SABR model but while I'm perfectly happy with the fit to market data I don't know how to handle the low-strike-prob...