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berege
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Posts: 11
Joined: January 26th, 2015, 7:44 pm

Illiquid swaption implied vol calculation

December 27th, 2016, 10:54 pm

Hey friends,

In Turkish Lira, TRY swaps are traded every once in a while but you rarely see some go ahead and pay fixed 2Y TRY vs receive float 3M TRLIBOR ( or vice versa) hence, TRY swaptions aren't liquid.

Most of the activity is done via XCCY swaps, which in turn results in the derivatives to be on XCCY swaption as these are more liquid.

I wonder if there is any way to back out illiquid swaption implied vol level ( TRY swaption in this case) through XCCY TRY-USD and USD swaptions like we can do in FX space with triangulation rule ?

Assuming I can also apply the triangulation, to be in ball park for TRY swaption, what would you suggest to use as my correlation ? Even in FX, implied correlation isnt easily found- I dont think it would be any easier for swaptions. I am thinking about creating a time series of USD 2Y IRS swap and TRY-USD 2Y XCCY swap wit 5 years of history and calculate correlation between those 2 arrays. 

Appreciate any input here. Thank you.
 
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doublebarrier2000
Posts: 237
Joined: July 14th, 2002, 3:00 am

Re: Illiquid swaption implied vol calculation

January 16th, 2017, 12:35 am

no triangle rule here but I am sure you can use some sort of joint calibration
 
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berege
Topic Author
Posts: 11
Joined: January 26th, 2015, 7:44 pm

Re: Illiquid swaption implied vol calculation

January 16th, 2017, 1:13 am

Thanks doublebarrier2000. Would appreciate if you could elaborate a bit more in terms of any specific method or widely used ballpark calculation for joint calibration.
 
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berege
Topic Author
Posts: 11
Joined: January 26th, 2015, 7:44 pm

Re: Illiquid swaption implied vol calculation

October 28th, 2020, 10:34 pm

After all these years, I'd be keen to hear any suggestion on this. Thanks
 
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pcaspers
Posts: 701
Joined: June 6th, 2005, 9:49 am

Re: Illiquid swaption implied vol calculation

October 29th, 2020, 8:07 am

For example, you might use a Hull White Model for the TRY and USD interest rate processes and a Black-Scholes Model with stochastic rates for the TRY/USD FX process (sometimes called "long term FX" model I think). Assume you have somehow fixed the mean reversions for both Hull White Models and also the correlations TRY-USD, TRY-TRY/USD, USD-TRY/USD. Then you can calibrate the USD Hull White Model to swaptions in the usual way and after that the TRY Hull White Model and simultaneously the FX TRY/USD process to XCCY swaption prices and FX Option Quotes. Notice the model's FX option prices depends on the TRY interest rate volatility, therefore you need the simultaneous calibration. After that you can price TRY swaptions in the calibrated model and back out their implied volatility.
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