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billyx524
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Posts: 45
Joined: February 12th, 2016, 4:48 pm

SABR backbone

January 18th, 2020, 5:20 am

Hi,

I understand the SABR backbone is the ATM volatility as a function of the forward rate, but can someone explain to me what is the significance of this backbone term?
 
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frolloos
Posts: 1621
Joined: September 27th, 2007, 5:29 pm
Location: Netherlands

Re: SABR backbone

January 21st, 2020, 2:28 pm

It gives you part of the delta you need in order to delta hedge the option as the backbone is essentially how the implied volatility moves as the forward moves (all else constant). See and read also the paragraphs at equations (3.9) and (3.10) in Hagan et al paper introducing the SABR model. 
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