Quick question on market practice:What is the daycount convention for calculating expiry? ie. if the number of days to expiry is, say, 176, then which year fraction (176/360, 176/365, etc) number the market uses to get to the market price of a swaption?

We do not quote swaptioms as "176D", so your question is a bit unclear.If someone wanted a 6m expiry, we would look at the date 6 months from today. Today being the first, we would look at the first of July. If it was a holiday, we would roll it forwards to the next good business day.As to the price, you are asking how a dealer chooses the value. This is not defined, at all. A trader will look at when, exactly, it expires, what is going on in the market, and will base his price on this.

QuoteOriginally posted by: NorthernJohnWe do not quote swaptioms as "176D", so your question is a bit unclear.If someone wanted a 6m expiry, we would look at the date 6 months from today. Today being the first, we would look at the first of July. If it was a holiday, we would roll it forwards to the next good business day.As to the price, you are asking how a dealer chooses the value. This is not defined, at all. A trader will look at when, exactly, it expires, what is going on in the market, and will base his price on this.Thanks.Assume client wants 165day expiry specifically. Let me clarify the question.(i) (Market Practice) If a dealer were to asked to quote, say a 165 day expiry 2 year swaption, what is the market practice day count to use for the expiry year fraction?(ii) (Bloomberg) On Bloomberg, if I price a 165day expiry into 2yr swaption, what day count does it use for the year fraction? (iii) (Theory) In theory, what is the correct year fraction to use?

Any swaption traders/quants here please help.

time to expiry is necessary in swaption pricing to calculate:1) ATM FWD: if you have boostrapped a curve you can calculate the ATM FWD given a date (non only a year fraction)2) DF (Expiry):if you have boostrapped a curve you can calculate the ATM FWD given DF (non only a year fraction)3) to have an idea of which vols to use: you will use an interpolation in the swaption vols matrix (doing this interpolation use the same mathod in calculating year fraction used in reading the matrix vol...not so important with respect to market bid-offer).

QuoteOriginally posted by: cksh2005Any swaption traders/quants here please help.I am trying to, yes.Did you want a different swaption trader?If they ask for 165D, then what do you mean "what daycount fraction"? It will expire in 165 days. Where does any fraction come into your numbers?I think that you maybe do not understand the reply I gave. You look on a calendar, count forward 165 days, and the expiry is on that date.When you ask what "expiry year fraction", what are you planning on using it for?You will tend to linearly interpolate vols, of that is what you are getting at?

QuoteOriginally posted by: NorthernJohnQuoteOriginally posted by: cksh2005Any swaption traders/quants here please help.I am trying to, yes.Did you want a different swaption trader?If they ask for 165D, then what do you mean "what daycount fraction"? It will expire in 165 days. Where does any fraction come into your numbers?I think that you maybe do not understand the reply I gave. You look on a calendar, count forward 165 days, and the expiry is on that date.When you ask what "expiry year fraction", what are you planning on using it for?You will tend to linearly interpolate vols, of that is what you are getting at?Sorry for not expressing my question in sufficient detail. One of my questions is:Bloomberg uses B-S for vanilla Swaption. B-S have time in years. So question is: how does the Bloomberg calculator treat 165days. Is it 165/365 years or 165/366 years (for leap year)? Or is it some other convention? Put it another way: what does the calculator use for time to expiry? Sure, it is 165 days, but is it 165/365 years or 165/366 years, or some other convention?Hope this help illuminate my query.

QuotePut it another way: what does the calculator use for time to expiry? Sure, it is 165 days, but is it 165/365 years or 165/366 years, or some other convention?The short answer is: it doesn't matter. In the B-S formula, the option price is a function of total variance (sigma^2 times t), so as long as t and sigma^2 are in the same units, it doesn't matter.Off of the top of my head, I don't know what convention Bloomberg uses. The two most common ones used in practice are to divide by fixed denominators, 365 or 365.25. When you start trying to use some adjustment for leap years in the denominator, you get cases where (depending upon the daycount convention used) you get year fractions over intervals [T0, T1] and [T1, T2] not adding up to the year fraction for [T0, T2].Be aware that some shops use business days instead of calendar days. In that case, time is measured in business days divided by, say, 252. This is more often done in the pricing of very short dated options. Again, as long as vol and time are in the same units, it doesn't matter much in the calculation.

QuoteOriginally posted by: cksh2005QuoteOriginally posted by: NorthernJohnQuoteOriginally posted by: cksh2005Any swaption traders/quants here please help.I am trying to, yes.Did you want a different swaption trader?If they ask for 165D, then what do you mean "what daycount fraction"? It will expire in 165 days. Where does any fraction come into your numbers?I think that you maybe do not understand the reply I gave. You look on a calendar, count forward 165 days, and the expiry is on that date.When you ask what "expiry year fraction", what are you planning on using it for?You will tend to linearly interpolate vols, of that is what you are getting at?Sorry for not expressing my question in sufficient detail. One of my questions is:Bloomberg uses B-S for vanilla Swaption. B-S have time in years. So question is: how does the Bloomberg calculator treat 165days. Is it 165/365 years or 165/366 years (for leap year)? Or is it some other convention? Put it another way: what does the calculator use for time to expiry? Sure, it is 165 days, but is it 165/365 years or 165/366 years, or some other convention?Hope this help illuminate my query.As already said, it is variance that you put into the BS equation. I would describe it as act/act, though, if you wanted to translate it in to year fractions.