Lognormal Vol and Normal Vol

amkey04 · August 31st, 2004, 1:38 am

Hi, I have a few basic questions on option vols which I hope someone can answer them,a) Is market quoted vols on broker page lognormal vols?b) If is lognormal vols, why we need to calculate normal vols?Thanks a lot for any help in advance Amkey04

Pat · September 3rd, 2004, 12:17 pm

Virtually all screens quote log normal vols.Some traders (especially in IR) like to think and trade in terms of normal vols, because the normal model: has symmetric breakevens, doesn't get into trouble for very low rates (like log normal models do), and they find it more intuitive to think in terms of rates moving up or down X bps per year (for a 1 std dev move).

amkey04 · September 13th, 2004, 8:57 am

Hi Pat,Thanks for the reply. =) Amkey04

Raph · September 26th, 2005, 11:42 pm

Further question.... I've heard that you can convert lognormal vols to normal vols using the approximation NVol = LNVol x sqrt( ATM Fwd x Strike)For short rate models....Since for lognormal vols, dr/r = udt + LNVol dz andSince for normal vols, dr = udt + NVol dz Wouldn't NVol = r x LNVol..... can anyone help me reconcile these two ideas?Many thanks!!-Raph