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Implied Vol and Libor rates
Posted: October 5th, 2010, 1:41 pm
by fniski
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
Implied Vol and Libor rates
Posted: October 5th, 2010, 1:48 pm
by daveangel
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.
Implied Vol and Libor rates
Posted: October 5th, 2010, 7:19 pm
by Gmike2000
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?
Implied Vol and Libor rates
Posted: October 5th, 2010, 8:10 pm
by daveangel
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.
Implied Vol and Libor rates
Posted: October 6th, 2010, 11:42 am
by Martinghoul
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.