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Bermudan swaption misprice

Posted: May 18th, 2019, 2:06 pm
by kelang
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!

Re: Bermudan swaption misprice

Posted: May 18th, 2019, 11:21 pm
by ISayMoo
Supply and demand.

Re: Bermudan swaption misprice

Posted: May 21st, 2019, 7:07 pm
by fyvr
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.