Jump to content
Savvysoft Forums
Rich_Tanenbaum

Different versions of swaption function

Recommended Posts

In TOPS, when we come out with a new version of a model (function), we strive to retain backward compatibility for users who may not be ready to switch. When we add new parameters to a model, we need to create a ne model to allow users to distinguish between the two versions (in C++ this happens automatically, but Excel (fortunately or unfortunately) is not C++ (though TurboExcel does blur the line)).

 

So in the beginning there was Swaption.

 

Then along came Swaption2. This model allows you to specify a spread on the floating leg, whereas in Swaption we had advised users to manually move the spread over from the floating side into the coupon. Swaption2 also allows you to explicitly state whether the strike is a price or a yield. In Swaption, strikes below 30 are interpreted as price strikes, and greater than 30 are yield strikes. This works pretty well for most options, but for long term options on zero coupon bonds it causes ambiguities, requiring yield strikes.

 

Swaption3 was created with the same parameter list as Swaption2, but it behaves differently: it internally calls into Swaption2, and if the return value is the dreaded error "Volatility declining too fast" is takes a single point off the vol curve, and passes that into Swaption2 instead.

 

Swaption4 also takes the same parameters as Swaption3, but the volatility input is interpreted differently: it is a vol cube instead of a vol matrix. This allows you to price swaptions using a vol skew. The vol is a four column range, where the first column is expiration, the second column is maturity, the third column is moneyness, and the fourth column is volatlity. The reason we didn't resue Swaption3 is that it wouldn't be possible to tell whether the vol input was a matrix or a cube, so the model name is used to distinguish it.

Share this post


Link to post
Share on other sites

Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

×