Implied Vol and Libor rates

fniski · October 5th, 2010, 1:41 pm

Hello everyone!This might be a silly question, but it is a little confusing to me.When one is evaluating the implied vol of an option expiring in one year, he (usually) use the 1-year Libor risk freerate, right? And what do you use when evaluating the implied vol of an option expiring in 6 month?Can you use the 6 month Libor rate?I guess you just have to change some normalization parameters (say instead of dividing by 252 you divide by 126). Is it better, worse or the same?Thanks

daveangel · October 5th, 2010, 1:48 pm

you should be using zero coupon rates obtained from a yield curve. in generate, rate "time" is the actual time whereas vol time might be business days.

Gmike2000 · October 5th, 2010, 7:19 pm

Yes, and if two counterparties use different discount curves, guess what, they get different vols!Are all options going to switch to forward premia at some point? What ju think?

daveangel · October 5th, 2010, 8:10 pm

yes but there is only one forward which is the one you imply from call/put parity but I think that is beyond the scope of this thread.

Martinghoul · October 6th, 2010, 11:42 am

Well, given that the spot -> fwd premium transition has happened in non-USD swaptions, I don't see why that couldn't happen for everything else.