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lePiddu
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Joined: March 17th, 2015, 2:15 pm

Cap / Floors Volatilities - huge problem

March 19th, 2015, 10:41 am

Hi everyone,I'm facing a problem here where market makers are no more quoting Euribor 3m Black volatilties (or are quoting impossibile- to-reach Black prices) for Interest Rate Caps. My question is: do you guys have any interesting idea on how to recover and price Eur3m volatilities/prices? I mean there's no model here or anything that can be used, what would you calibrate and to what?
 
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bearish
Posts: 5425
Joined: February 3rd, 2011, 2:19 pm

Cap / Floors Volatilities - huge problem

March 19th, 2015, 12:06 pm

I would use a simple gaussian model (or quoting convention) and express volatility in terms of basis points per year. If you have access to Bloomberg, run VCUB and set the volatility convention to "Normal".
 
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cemil
Posts: 221
Joined: September 16th, 2005, 7:44 am

Cap / Floors Volatilities - huge problem

March 19th, 2015, 12:14 pm

Change the model with "Normal" model ( Bachelier) or you can use shifted Black
 
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lePiddu
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Posts: 20
Joined: March 17th, 2015, 2:15 pm

Cap / Floors Volatilities - huge problem

March 19th, 2015, 12:50 pm

Thanks for the answers guys. I'm indeed using a shifted log-normal model to price options. The problem remains in calibration. Especially options against Euribor 3m. The caplet volatilities indeed are not "speaking to each other" between different tenors and for the 1yr-1.5yrs-2yrs options (those vs eur3m) I'm totally alone because there are none in the market (check ICAP for example the first 3 rows are not quoted). What Gaussian multi-curve model would you suggest?
 
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lePiddu
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Posts: 20
Joined: March 17th, 2015, 2:15 pm

Cap / Floors Volatilities - huge problem

March 19th, 2015, 12:50 pm

Thanks for the answers guys. I'm indeed using a shifted log-normal model to price options. The problem remains in calibration. Especially options against Euribor 3m. The caplet volatilities indeed are not "speaking to each other" between different tenors and for the 1yr-1.5yrs-2yrs options (those vs eur3m) I'm totally alone because there are none in the market (check ICAP for example the first 3 rows are not quoted). What Gaussian multi-curve model would you suggest?
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Cap / Floors Volatilities - huge problem

March 20th, 2015, 7:50 pm

For the shorter-dated 3mE stuff which you're not able to find on ICAP, you might just have to rely on the listed prices...
 
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karfey
Posts: 58
Joined: October 3rd, 2012, 12:37 am

Cap / Floors Volatilities - huge problem

April 8th, 2015, 9:35 am

Hi Martinghoul,just to clarify, by listed prices, you mean the actual premiums of the caps?Thanks.
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Cap / Floors Volatilities - huge problem

April 8th, 2015, 9:37 am

I mean the premia for the exchange-traded Euribor futures options (which are, effectively, IMM expiry caplets/floorlets)...
 
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lePiddu
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Posts: 20
Joined: March 17th, 2015, 2:15 pm

Cap / Floors Volatilities - huge problem

April 9th, 2015, 8:33 am

That's a very interesting solution and some of my colleagues were thinking about it. The problem is that there's not too much trading activity around those instruments.
 
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Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

Cap / Floors Volatilities - huge problem

April 9th, 2015, 10:46 am

QuoteOriginally posted by: lePidduThat's a very interesting solution and some of my colleagues were thinking about it. The problem is that there's not too much trading activity around those instruments.Not too much trading activity around Euribor futures options?
 
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lePiddu
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Posts: 20
Joined: March 17th, 2015, 2:15 pm

Cap / Floors Volatilities - huge problem

April 9th, 2015, 11:55 am

I must admit I'm not on the market (i.e. bbg chats and so on) because I'm still an intern here and do not have access to bbg, tho I see we do not have any of those positions opened and I never saw one since 2 months.I'm in charge of pricing caps/floors/swaptions for our customers and I just refer to the VCAP pages for setting up my murex platform.So up to now the solution is "leave BGM to die and calibrate Bachelier"?
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