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Lognormal Vol and Normal Vol
Posted: August 31st, 2004, 1:38 am
by amkey04
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
Lognormal Vol and Normal Vol
Posted: September 3rd, 2004, 12:17 pm
by Pat
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).
Lognormal Vol and Normal Vol
Posted: September 13th, 2004, 8:57 am
by amkey04
Hi Pat,Thanks for the reply. =) Amkey04
Lognormal Vol and Normal Vol
Posted: September 26th, 2005, 11:42 pm
by Raph
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