Smiling at Convexity: Bridging Swaption Skews and Cms Adjustments
16 Pages Posted: 21 Mar 2006
Date Written: 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.
Keywords: swaption, CMS, volatility smile, volatility skew, convexity adjustment, SABR, stochastic volatility, calibration
JEL Classification: C61, G12, G13
Suggested Citation: Suggested Citation