Fwd vol vs Vol Traingle

SpeedBall · November 21st, 2011, 8:42 pm

Hi,Does anyone here have thoughts on when to prefer a fwd vol trade (buying longer expiry spot swaption vs selling a mid curve) over doing a vol triangle for ex if when would you prefer [buying 10y5y vs selling 5y5y5y midcurve] over [buying 10y5y + 5y5y - 5y10y]To me both trades should look attractive at the same time when looked the normalized vols...Would you take a view on correlations when you prefer the fwd vol version? But given that the market makers will in most cases take the conservative correlation to price the midcurve the choice might be tough?Thanks,

SpeedBall · November 26th, 2011, 7:39 am

Any thoughts?

Martinghoul · November 28th, 2011, 9:56 am

Mid-curves are a lot more difficult (liqudity-wise, etc), so I always look at the triangles and almost never at the fwd vols.

prodiptag · November 28th, 2011, 10:00 am

in a BS-like world with flat skew, these two options are basically same, the long/short straddle just replicatiing the midcurve. So the difference is actually how you thik about the midcurve, outright vs replicating them. ... and yes, dealers will not price midcurves very sweet, esp off ATMF (like when you unwind), there is no market for long tenors mid curve skew