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Smiling at Convexity: Bridging Swaption Skews and CMS Adjustments


Fabio Mercurio


Bloomberg L.P.

Andrea Pallavicini


Banca IMI; Imperial College London - Department of Mathematics
May 25, 2006


Abstract:     
The price of a CMS based derivative is largely affected by the value of swaption volatilities at extreme strikes. In this article, we propose a very simple procedure for stripping consistently implied volatilities and CMS adjustments from the market quotes of swaption smiles and CMS swap spreads.

Number of Pages in PDF File: 16

Keywords: swaption, CMS, volatility smile, volatility skew, convexity adjustment, SABR, stochastic volatility, calibration

JEL Classification: C61, G12, G13

working papers series


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Date posted: March 21, 2006  

Suggested Citation

Mercurio, Fabio and Pallavicini, Andrea, Smiling at Convexity: Bridging Swaption Skews and CMS Adjustments (May 25, 2006). Available at SSRN: http://ssrn.com/abstract=892287 or http://dx.doi.org/10.2139/ssrn.892287

Contact Information

Fabio Mercurio
Bloomberg L.P. ( email )
731 Lexington Avenue
New York, NY 10022
United States
Andrea Pallavicini (Contact Author)
Banca IMI ( email )
Largo Mattioli 3
Milan, MI 20121
Italy
+39 02 7261 (Phone)
HOME PAGE: http://apallavicini.it
Imperial College London - Department of Mathematics ( email )
South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom
Feedback to SSRN (Beta)


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