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SWilson
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Joined: February 13th, 2018, 5:27 pm

Volatility for Commodity Swaption

October 11th, 2019, 3:21 pm

I have a swaption that when exercised it has 12 delivery months as a strip, all or nothing.  I have the implied volatilites of the options and I have a historical vol of the underlying prices.  What is a good starting point to model the volatility of this swaption?? 
 
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SWilson
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Re: Volatility for Commodity Swaption

October 11th, 2019, 9:46 pm

Im using an implied forward which seems to hold up for now.  Thanks.  
 
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tw
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Joined: May 10th, 2002, 3:30 pm

Re: Volatility for Commodity Swaption

October 13th, 2019, 4:10 pm

I have a swaption that when exercised it has 12 delivery months as a strip, all or nothing.  I have the implied volatilites of the options and I have a historical vol of the underlying prices.  What is a good starting point to model the volatility of this swaption?? 
There are numerous models for term structure in commodities, each of which could put a price on your swaption.
Some the classic stuff from the 90s (stochastic convenience yield, Gabillon etc) might be a starting point.
The first thing I would do is inspect the shape of the vol term structure and see if that could be easily fit from any of the models.
Is it a standard backwardation? Is it humped?
Is it even reliable data with decent liquidity for each month ? Is the magnitude of the monthly term structure excessive ?
If your chosen model describes that well it’s swaption price will be believable.

Often the liquidity of the underlying products can be a guide. Which is more actively traded? The 12 month future of the calendar swap ?

Depending on the commodity I have seen modelling sophistication vary between libor style models and marking the calendar at the average of the 7th and 8th month.

What is the commodity ?
 
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SWilson
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Joined: February 13th, 2018, 5:27 pm

Re: Volatility for Commodity Swaption

October 14th, 2019, 2:09 pm

Natural gas.  It's a pretty standard curve with some seasonality.  I ran a few different stochastics but I am still working on it.  i was messing around with SABR and Heston but SABR is really more for interest rates that have different tenors. 
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