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Chapter 4: Interest Rate Derivatives: 4.3 Swaptions
Chapter 4: Interest Rate Derivatives: 4.3 Swaptions
4.3 Swaptions
The dependence between different forward rates will enter valuation procedure.
The x y -swaption has expiry in x years and underlying swap length is y years.
Pn
Swptr (t) = N i=1 P(t, Ti ) (K (d2 ) Rswap (t)(d1 ))
Pn
Swptr (t) = N i=1 P(t, Ti ) T0 t (D(D) + (D))
Rswap (t) K
D= .
T0 t
The accrual period = Ti Ti1 for underlying swap can differ from prevailing
for caps within the same market region.
E.g. euro zone: caps are written on semiannual LIBOR ( = 1/2), while swaps
pay annual coupons ( = 1).
Blacks implied volatilities (in %) of EUR ATM swaptions on August 30, 2013.
Maturities are 1,2,3,4,5,7,10 years, swaps lengths from 1 to 10 years:
100
Lenghts
80
1YR 2YR 3YR 4YR 5YR 6YR 7YR 8YR 9YR 10YR
An interest rate model for swaptions valuation must fit given volatility surface.
Normal implied volatilities (in bps) of EUR ATM swaptions on August 30, 2013.
Maturities are 1,2,3,4,5,7,10 years, swaps lengths from 1 to 10 years:
100
90
Lenghts
An interest rate model for swaptions valuation must fit given volatility surface.