Bloomberg volatility cube
Posted: December 23rd, 2008, 1:58 pm
by vin250686
We have been provided with bloomberg vols cube VCUB for caps, we need vols for caplet in a different maturity and strike from the ones displayed. we need to interpolate, do we have to use a cubic spline interpolation? could you suggest the easyiest source to learn how to do it? can we at least linearly interpolate beetween strikes? have you ever heard about the "hump function"? is it good for interpolation between maturities?thx
Bloomberg volatility cube
Posted: December 29th, 2008, 9:05 am
by Curves
you can interpolate which ever way you like. it depends on your purpose and how your market maker is making the market for you.but the popular method in my opinion is SABR, you will have to infer the SABRs from the observed prices, in your case since you are starting with BBG VCUB you have sufficient number of points to have fairly robust estimates of SABRs. you can look up Hagan et al for SABR, quite a few papers there. other forum topics should contain the links to these papers. this you need if you are interested in caplets, otherwise if you are approx calculating the caps / floors then you could use any reasonable interpolation method on the vols i suppose, again depends on what exactly you desire to do.also BBG VCUB has SABRs.