<t>Thanks so it means we have to analyze systematically the consensus to extract meaningful information as opposed to blindly trying to match it for each product class.MaxCohen> Do you use Markit/TOTEM data yourself? In your experience do you feel that the "rejection out of stdev policy" from Markit...

<t>Thanks for your reply. The thing that worries me is:- Different services will have different contributors so the "consensus" for a given exotic does not reflect the "consensus" on the ATM vol or smile.- Even when it is used to mark reserves, this has a direct impact on the economic value of the t...

<t>Are there practitioners around here who are using TOTEM/Markit to mark their books?While analysing TOTEM/Markit data on all kind of structures (from vanilla swaptions to exotics) we sometimes find arbitrages or weird shaped implied curves which is making us question the validity of such a "consen...

<t>I agree that other effects could enter into account but these prices where for a 5Y volswap on CMS 10Y all collateralized in OIS, so I would guess everybody has a fairly identical discounting and ATM volatilities up to 5Y...As for mean reversion, I would think it would be best to calibrate to the...

<t>Thanks for your suggestion Piterbarg! I have just read the chapter from your book and indeed it clearly shows that a volatility swap is heavily dependent on the model implied smile dynamics.I expected a stochastic volatility model to generate a lower forward volatillity compared to a local volati...

<t>One question about your methodology: you will be convexity adjusting the CMS using the market smile by replication but then use the ATM normal volatilities for the spread (therefore assuming that the CMS rates are normally distributed whereas they do show a smile via the replication with the swap...

<t>Hello.A trader has asked me to price for a volatility swap that pays at a date Tend the following payoff:ABS(10Y_Tend - 10Y_Tstart)10Y_Tend = 10Y swap rate fixed at Tend10Y_Tstart = 10Y swap rate fixed at TstartTstart and Tend are separated by a 1Y periodI have a price using our production Hull a...

<t>Hello,Could you give a bit more details about:>>1.- Compute the forward rate of the CMS>>2.- Take the difference between the CMS vs. the strike>>3.- Multiply the difference by the delta of the option>>4.- Finally, add it to the premium to derive the MTMIs this how you compute an option on CMS or ...

<t>Hi,I didn't notice that you were using Nu as vol of vol so I meant in fact Nu^2 * T. Convexity is very high in EUR now so the SABR formula is giving unreasonable high wings.Interpolating with the SABR formula does not bother me too much provided that it is done within the range where the formula ...

QuoteOriginally posted by: mjuse a different smile... ie don't use SABRHi,What would then be the model of your choice to replace SABR?

<t>Hi,1) I agree that for short maturities a 2nd order expansion is probably fine. However, the issue is that the valid domain for the approximation is controlled by Alpha^2*T and in current market conditions (Alpha high in EUR), this domain will be drastically reduced compared to "standard" market ...

<t>Hi,What do you call the Bachelier model? Is it the Swaption pricing formula assuming a normal diffusion as opposed to Black76?If that is the case, it does not matter whether you use the Bachelier formula or the Black76 formula for your swaption as long as you input a consistent volatility (ie you...

<t>Hi,Why not move away from SABR and use as input to your copula a more decent model which will have a well-defined cumulative?I agree that asymptotic expansions are good to get a better intuition of the effects of all the parameters in a model, but one should not rely on them for the actual pricin...

<t>Hi,This may be a stupid question but why do people continue to investigate higher order approximations to SABR given that:- An approximation will by definition fail at some point.- Maturities can go up to 30Y or more for swaptions.- Payoffs that can be priced by pure replication (parabolas or CMS...

<r>Hi,I am trying to build a CMS pricer by replicating the payoff with cash settled swaptions and SABR for the volatility smile construction.Several papers (<URL url="http://www.fabiomercurio.it/RiskDRME.pdf">http://www.fabiomercurio.it/RiskDRME.pdf</URL> for example), are explaining that you need t...