Smiling at Convexity: Bridging Swaption Skews and CMS Adjustments
Banca IMI; Imperial College London - Department of Mathematics
May 25, 2006
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, G13working papers series
Date posted: March 21, 2006
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