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BBG Swaption vols - "Black" vs "Normal"

July 10th, 2014, 8:57 am

Yes, questions around this have very likely been discussed somewhere, but my question it seems has not.I was sitting with a trader, soon to be the CVA trader at my bank and, looking at the Swaption vols on BBG to be used in our Hull-White interest rate model calibration, he (slightly unfairly) challenged me by saying "this can't be right!".The problem is that the "Black vols" from BBG are just too high for him, especially when we compare this to the "Normal vols". Unfortunately I can't upload images from my work so you will just have to trust me when I say that the Black vols for CHF (Swiss Franc) are very high when compared to the Normal vols for the same set of Swaptions. Looking at the 1m x 5Yr the Black vol is around 220% and the Normal Vol is about 6%. The trader was fairly convinced that one would have to use the "Normal vol" (in the Black Formula!!!) when pricing a Swaption as opposed to the Black formula. At this stage I did not want to patronise him and explain the obvious thing that a Black Vol is simply implied from the Black pricing formula - I probably should have. Anyhow, 220% vs 6% will of coure have a huge impact on the calibration and because I am not an expert, I need to know if I am missing something. My view is go with the Black vol and be done with it.thoughts?thanks
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BBG Swaption vols - "Black" vs "Normal"

July 10th, 2014, 9:15 am

you are right with the big difference between the BS Vol and Normal Vol. The market uses more and more normal vol.You have to modified your model "formulae" for calibration and pricing to use normal vol.
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BBG Swaption vols - "Black" vs "Normal"

July 10th, 2014, 3:00 pm

Firstly, I think you got smth wrong there... 1m5y CHF ATM normalized vol is arnd 29bps. Given that the fwd is arnd 31bps, 1m5y lognormal (aka Black) vol is arnd 94%.