What is Vol swaption?
What is Vol swaption?
An implied volatility is the volatility implied by the market price of an option based on the Black-Scholes option pricing model. An interest rate swaption volatility surface is a four-dimensional plot of the implied volatility of a swaption as a function of strike and expiry and tenor.
What is a swaption price?
An interest rate swaption is an option that provides the borrower with the right but not the obligation to enter into an interest rate swap on an agreed date(s) in the future on terms protected by the swaption. The buyer/borrower and seller agree the price, expiration date, amount and fixed and floating rates.
What is swaption deal?
A swaption, also known as a swap option, refers to an option to enter into an interest rate swap or some other type of swap. In exchange for an options premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date.
What is a call swaption?
A call swaption, or call swap option, gives the holder the right, but not the obligation, to enter into a swap agreement as the floating rate payer and fixed rate receiver. A call swaptions is also known as a receiver swaption.
What does normal volatility mean?
Normal vol assumes the forward interest rate has constant vol in absolute terms. In Black vol, the chance of the interest rate going from 1% to 2% is the same as the chance of it going from 2% to 4%. With normal vol, the chance is the same as going from 2% to 3%.
What is the pricing aspect of swaptions?
So let us discuss the pricing aspect of swaptions now. In the case of swaptions, for pricing, Black model is used. Swaptions are the swap options, which implies that they allow swapping of interest rate in the future at a predetermined price. Let us take a look at the formula for pricing payer’s swaptions, which is:
What is a ‘put’ swaption?
A ‘put’ swaption, or Receiver swaption, allows the option buyer to enter into an interest-rate swap in which the buyer of the option receives the fixed rate and pays the floating rate. Strike swap rate values, specified as a NINST -by- 1 vector of decimal values.
What is call swaption or payer swaption?
A Call swaption or Payer swaption allows the option buyer to enter into an interest rate swap in which the buyer of the option pays the fixed rate and receives the floating rate.
Can par swap rates be negative in the normal model?
There are some realizations of the par-swap rate that can be negative in the normal model; as opposed to the lognormal model where par swap rates are non-negative. Since the volatility input for the normal model refers to the volatility for the actual basis point changes – it tends to be smaller than volatility for the lognormal case.
