There is something I don't understand....why would you want to bet on the convergence of implied volatilities in two different markets?Why should there be any correlation among them?

<t>Hi ACI guess your approach is correct for single asset options, but for multi-asset you have to match not only marginal but also joint distributions. In this case I'm not sure the solution you are suggesting is correct. Maybe the fact that you're retrieving market prices could be due to a low cor...

<t>Hi RobertGmy plan was indeed to use a parametric correlation function for the instantaneous correlation between forward libors. But I guess I first need an estimation of instantaneuous correlation based on time series of forward libor rates. Then, I would fit a parametric function like the one yo...

Hi there,I would like to know what is the best approach in order to estimate instantaneous correlations for libor forward rates (in a BGM setting).Any help will be greatly appreciated.

Hi CaroeQuoteCoupon = min{K, C*(CMS10Y - CMS2Y)} & floored at zero, i.e. Coupon = max{0, min{K, C*(CMS10Y-CMS2Y) }}how can you price such structures without simulation? Is there a closed formula approach?

<t>Hi allI'm trying to estimate the forward libor instantaneous correlations in a BGM model from time series.The method I use is the following:1) I download from my provider the time series of market instruments (depo, futures, swaps)2) For each day in the past I bootstrap the discount curve and cal...

Why don't you just simulate the CMS rate in a Swap Market Model (Jamshidian like)?

Why do u want to know?

Kipi,QuoteI used convexity to have CMS10y(0,T(i)), CMS2y(0,T(i)) (Hagan formula orPessler ). please, can you provide references for these formulas you were talking about?Thanx!

<t>Hi there,what is the best way of pricing CMS spread options, i.e. with cashflows proportional to the difference between two CMS rates (with a cap and a floor)?After having had a look at the related messages posted on the site, it seems to me that there are several approaches:- MonteCarlo pricing ...

JanDash, yes the Caplet(T(i),K) already contains the discount factor.I'll try have a look at your book. Thanks for help!

<t>JanDash,actually I was previously thinking about some sort of convexity adjustment, but then I realized a gross approximation was perhaps needed...I had in mind to use the following:which I guess is the same as you were suggesting, if I got it right.Beg your pardon, what do you mean by CMT calcul...

<t>JanDash,I'm not sure that would be correct...Indeed let us concentrate on the single caplet fixing at T_i; its price is:where L(T_i) is the Libor fixing at T_i and D(T_{i+1}) is the(stochastic) discount factor.Applying the tower property of the expected value operator and conditioningwith respect...

<t>Hi,I would like to know how to price a "memory cap", i.e. an instrument having the following payoff:1) at first payment date it pays: max(0; Libor(T_1) - K) where T_1 is the first fixing date and K is the strike2) at subsequent payment dates, it pays: max(0; Libor(T_i) - K) + previous couponIt sh...

<t>Hi thereI'm using quanto adjustment formula to price differential swaps. However it's not clear to me how to get the volatilities and correlation specified in the formula. More precisely the foreign forward (with T settlement date for the forward) has to be multiplied by: exp( mu*T), where:mu = -...