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kelang
Topic Author
Posts: 46
Joined: November 14th, 2011, 4:53 pm

Bermudan swaption misprice

May 18th, 2019, 2:06 pm

hello all,

Sure this topic must have been discussed in the past.

Tried to price some USD Bermudan swaptions to match the market mid with different models (LGM, G2++, LMM), but all these models seem to over-price quite a bit.

Understood that Bermudans are in general priced at some discount in USD market. But what’s the general discount mechanism? E.g. lower mean reversion speed in LGM? or lower swaption vols? Or playing the switch ratio? Or some magic discount formulas?

Thank you all!
 
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ISayMoo
Posts: 1718
Joined: September 30th, 2015, 8:30 pm

Re: Bermudan swaption misprice

May 18th, 2019, 11:21 pm

Supply and demand.
 
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fyvr
Posts: 12
Joined: November 15th, 2015, 3:10 pm

Re: Bermudan swaption misprice

May 21st, 2019, 7:07 pm

Depends a bit on the strike. The street is long up the wazoo berm vol from callables (so bid is super-soft), but massively short at ultra-low strikes from selling low-strike CMS floors as pension ALM hedges. If you’re looking at an ATM (or close) strike I’m not surprised  you found that the market bid was << model theo. 
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