Hi,just saw this old discussion without an answer.I would be interested in the latter if anyone has it.I.e.: how does the PDE for a swaption look like, assuming that the forward swap rate is lognormally or normallydistributed where the solution is Black76? (In log- or normal version).

would be great if you can post a reference. never saw a paper on exactly this. (equity options yes, swaptions no)

<t>thanks for your reply.but my question was rather how to e.g. modify black76 or do whatever similar to assess potential transaction costson a stand-alone basis in the first place, not to see whether the resulting price would be achievable in the market.(this might be the second step...)if you have...

<r>hi, maybe I'm missing your point, but I'll try again.If you're calibrating "Heston as usual", then I suppose you're using Heston with deterministic rates.If you want to calibrate "Heston HW", then you're using a different model.Plain Vanillas can be solved via FDM or I guess some approximation, a...

<t>hi,I guess G1 is just Hull/White?I'm not sure whether I really understood where your problem is.If you have an efficient vanilla pricer for the hybrid process you could eithertry to calibrate all remaining parameters or plug in some parameters (e.g. rates/equityvol) and calibrate the rest. As you...

<t>hi alan,'cognitive dissonance' is a nice term for what I experience for quite a while now I'm currently waiting for the delivery of the recent SABR/LMM book from Rebonato,extending resp. linking the two models.It has a part called 'Empirical Evidence'. Hopefully there's also something interesting...

<t>hi alan,there are people using the hull-white model for valuing ir exotics where the rates can go negative, so whyshould you then bother if the rate can hit zero and potentially stay there?I guess the philosophical question is whether a model should describe in a sense some realistic underlying d...

<t>thanks for your answer.I like the idea of specifying some distribution for the average, but I'm also thinkingabout product variations, where the order of the rates matters (e.g. period-wisefixings.) Hmm... although it might get quite toxic if one mixes a cliquet witha floor based on a CMS rate......

QuoteOriginally posted by: KackToodles fixed income is based on formulas; once you have the formulas coded up, any monkey PM can run the models. ???equities are 1-dimensional, interest rates are much more complicated...

<t>hi,suppose we have a put on some equity index, where the strike is linked to someCMS rate, i.e. to guarantee the investor some "minimum return".The guaranteed level might be P x CMS(10) (e.g. P = 70%), the strike of the put is Notional x (1+average[CMS[ti,10]*P]))^Ti.e. the investor is guaranteed...

I would be happy with a simple fudge.Any ideas?

<t>Hi,For equity options with a single-signed gamma there is a simplemodification of the input implied vol in a BSM world to allow forestimating the cost when delta hedging with transaction costs, assuming the transaction costs are proportional to the underlying. (cf. PWOQF3, chapt. 48)Is something ...

nothing?if not, why not?

<t>hi,does anyone have an example for a retail product (equity/ir linked note or option) withan explicit embedded hybrid ir/equity derivative?(other than autocallables, e.g.)e.g. something like payoff = 100 x (1+part x max( average CMS(n), average perf. of SX5E))^T(just as an example)thanks & ch...

no idea?question unclear?too easy?