In Europe, I believe fairly soon, brokers will quote fwd premium swaption (as opposed to spot premium). This is a way (me think) of getting around the issue of (what method for) discounting. Indeed, there exists various methods for discounting and essentially the CSA discounting curve method is a hot topic. er... no one agrees on a specific method. But please let's not go down that path.This is an open question here. I am interested in reading comments/ideas about the new method of quoting premiums for vanilla options (caplets and swaption).I think this is the way fwd, and if anything this has been the case for quite a while already.Some ideas in the pond for the purists:- fwd premiuum is like quoting Black76- vega calculation does not use a discounting term- in the martingale approach the discounting term cancels out anywayhowever:- the fwd is build as a spread to the risk free curve so maybe a circular argument there...

It's neither good nor bad. It is what it is, especially given it's going to apply in the interdealer mkt only (as most dealers are happy to keep quoting prices to clients the same way as before).

thanks,how do you think one bank should cover itself against the risk of default of a counterparty (that is from spot to excercise date)? Is this going to be an issue you think?

QuoteOriginally posted by: Kerkabanacthanks,how do you think one bank should cover itself against the risk of default of a counterparty (that is from spot to excercise date)? Is this going to be an issue you think?Well, it's collateralized in a majority of cases, isn't it? So that aspect of it shouldn't really be affected by the convention change...

How to price the swaptions and how do you trade it?Very interestingIf you trade an ?old? quoted swaptions you calculate the option premium ?today? (and pay it maybe 2 days later) using for example Black. You use the same Swap for forward estimation and discounting ? and the theoretical price is expressed in percentage of nominal.How does it work with the new way? Is the pricing the same ? but the pay day of the premium is in the future so the theoretical price of the swaptions is adjusted with the ?funding? cost of the premium. OR? For example:Today you trade a 3M 10Y ATM payerStrike and Fwd = 2.25Vol= 32.75Theor Price = 0.69 using the ?old? (current) approachPremium paid in 2 days= 10m*0.69= EUR 69 000New approach???Today you trade a 3M 10Y ATM payerStrike and Fwd = 2.25Vol= 32.75BUT: The ?funding? of the EUR 69 000 is for example 69000*0.0105*(92/360)=185 using the same swap curve.So: The question is this EUR 185 taken into consideration? Is the theoretical price 0.69 ? 0.185 = 0.68815 but paid in 3 month??OR: Is the things I have described completely off?OR: Is it still just 1 swap curve or is the future premium calculated with a different forward curve?Thanks, Scalper

EONIA will be used for discounting the premium. My head doesn't really work any more today, so I can't be sure whether the other stuff you've said is correct.

I think the examples you posed are kind of reverse problem that people face. Say using black (or any other method you fancy)forward price = forward DV01 X function of (fwd swap rate, vol, strike, maturity)spot price = discount factor X forward pricenow for euro, mostly the swaptions are assumed to be cash-settled and fwd dv01, seen from today, becomes only a function of the fwd swap rate and the tenor. So to get people to agree on forward price, you need to agree on fwd swap rate (most of them do, usually), vol (this is what you are trading I guess!!) and strike/tenor/maturity (well... of course). To get them agree on the spot price, you need to agree on the discount factor too. And there lies all the issues of funding and stuff ... so in a way forward price kind of eliminates that.