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Does annuity depends on IR volatility skew?
Posted: October 18th, 2011, 1:39 pm
by braveyellowj
Could anyone elaborate on this?Usually for a variable, how to judge if the volatility skew will affect it? Any recommended materials to read.Thanks a lot!!
Does annuity depends on IR volatility skew?
Posted: October 19th, 2011, 3:07 pm
by gomer767
Volatility skew in time and strike (creating a surface) effects the pricing of everything that is longer dated
Does annuity depends on IR volatility skew?
Posted: November 10th, 2011, 2:03 pm
by gpop
An annuity being a sum of discount factors (eventually with deterministic weights), it will not depend on volatility as long as your DF do not depend on it.Actually your DF may result from a bootstrapping procedure where the only point concerning volatility would be the convexity correction for futures.I haven't seen any convexity correction based on volatility which is not the ATM one (as the ATM level means the level of the future itself).