So, suppose one were putting on a hedge of an exotic IRS option in which the hedge involved positions in european swaptions. On any given date, the relatively liquid quotes are for the standard matrix of BS vols. At least, that is my understanding. If one put on a hedge in these standard quoted swaptions and then had to rebalance some time later, then does one rebalance with the liquid quotes of the date of the rebalancing? In other words, if one rebalanced, does one enter into new swaptions with the same delta but with new expiries/maturities reflective of that new rebalancing date? Maybe this is a lame question....oh well.

QuoteOriginally posted by: NoniusSo, suppose one were putting on a hedge of an exotic IRS option in which the hedge involved positions in european swaptions. On any given date, the relatively liquid quotes are for the standard matrix of BS vols. At least, that is my understanding. If one put on a hedge in these standard quoted swaptions and then had to rebalance some time later, then does one rebalance with the liquid quotes of the date of the rebalancing? In other words, if one rebalanced, does one enter into new swaptions with the same delta but with new expiries/maturities reflective of that new rebalancing date? Maybe this is a lame question....oh well.Let me give some spin on this...I am looking at an exotic option that has some very very natural (almost model independent) hedges in terms of european swaptions with fixed expiries and fixed maturities. There is some rebalancing, but, ideally, the rebalancing would be in precisely those swaptions. I am sure that I could get quotes on those fixed swaptions as time goes by, BUT, I would think there would be a degree of vol bid/ask illiquidity that would arise that would effect transaction cost analysis.

on a related topic, what are the typical bid ask spreads for vanilla at the money standard swaptions?

come on you dickheads. Pat, where are you? You should know all of this sh*t. Please respond.

ok, since I've been playing assetswap trader lately, I would say that at least in this very simple situation, you will not hedge with what you might call 'on-the-run swaptions', because you already locked yourself into a certain cashflow calendar at the outset. You could periodically reinvest the money, but you'll take a yield hit this way since short-dated moneymarkets are going to be substantially sub-LIBOR.

Usually in the market the bid ask quotes spread would be 100 Pts for a typical mid vol quote. (as the market is highly liquid)Not entire matrix is liquid. in a day you can see scattered points on the matrix for which trades have occured . Rest of the matrix is interpolated based on the skew.

thanks guys, yes, I wanted to coin the term "on the run swaptions", yes, I did indeed.

QuoteOriginally posted by: chandsekUsually in the market the bid ask quotes spread would be 100 Pts for a typical mid vol quote. (as the market is highly liquid)Not entire matrix is liquid. in a day you can see scattered points on the matrix for which trades have occured . Rest of the matrix is interpolated based on the skew.but, wouldn't it be an interpolation of the skew AND the expiry?

QuoteOriginally posted by: NoniusQuoteOriginally posted by: NoniusSo, suppose one were putting on a hedge of an exotic IRS option in which the hedge involved positions in european swaptions. On any given date, the relatively liquid quotes are for the standard matrix of BS vols. At least, that is my understanding. If one put on a hedge in these standard quoted swaptions and then had to rebalance some time later, then does one rebalance with the liquid quotes of the date of the rebalancing? In other words, if one rebalanced, does one enter into new swaptions with the same delta but with new expiries/maturities reflective of that new rebalancing date? Maybe this is a lame question....oh well.Let me give some spin on this...I am looking at an exotic option that has some very very natural (almost model independent) hedges in terms of european swaptions with fixed expiries and fixed maturities. There is some rebalancing, but, ideally, the rebalancing would be in precisely those swaptions. I am sure that I could get quotes on those fixed swaptions as time goes by, BUT, I would think there would be a degree of vol bid/ask illiquidity that would arise that would effect transaction cost analysis.Are you talking static replication or dynamic hedging here? Or some kind of almost static replication...Ultimately, you'll have to hedge with what's available in the market at the time of rebalancing. If you turn to the market to do exactly what you need to hedge, i.e. sell a "22 months and 4 days expiry OTM swaption", you'll probably get ripped off. Better spread it between 1Y and 2Y liquid swaptions, and run some basis risk. Of course if you happen to have a customer who'd like a 22 month expiry swaption, you can show an aggressive offer. Inventory affecting your price. So, run a book and it won't matter too much.But I may be missing your point.

QuoteOriginally posted by: NeroTulipQuoteOriginally posted by: NoniusQuoteOriginally posted by: NoniusSo, suppose one were putting on a hedge of an exotic IRS option in which the hedge involved positions in european swaptions. On any given date, the relatively liquid quotes are for the standard matrix of BS vols. At least, that is my understanding. If one put on a hedge in these standard quoted swaptions and then had to rebalance some time later, then does one rebalance with the liquid quotes of the date of the rebalancing? In other words, if one rebalanced, does one enter into new swaptions with the same delta but with new expiries/maturities reflective of that new rebalancing date? Maybe this is a lame question....oh well.Let me give some spin on this...I am looking at an exotic option that has some very very natural (almost model independent) hedges in terms of european swaptions with fixed expiries and fixed maturities. There is some rebalancing, but, ideally, the rebalancing would be in precisely those swaptions. I am sure that I could get quotes on those fixed swaptions as time goes by, BUT, I would think there would be a degree of vol bid/ask illiquidity that would arise that would effect transaction cost analysis.Are you talking static replication or dynamic hedging here? Or some kind of almost static replication...Ultimately, you'll have to hedge with what's available in the market at the time of rebalancing. If you turn to the market to do exactly what you need to hedge, i.e. sell a "22 months and 4 days expiry OTM swaption", you'll probably get ripped off. Better spread it between 1Y and 2Y liquid swaptions, and run some basis risk. Of course if you happen to have a customer who'd like a 22 month expiry swaption, you can show an aggressive offer. Inventory affecting your price. So, run a book and it won't matter too much.But I may be missing your point.No, well, what you have described is exactly my point. The product that I am looking at would have a natural hedge with that odd expiry swaption. As you pointed out, you could probably get a bid on that vol, but it would be a rip off.