mtsm
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| Total Posts: 94 |
| Joined: Dec 2010 |
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Is it common to look at treasury futures option 'yield volatility skew'? If so, what is a common way of doing so, given that the market trades in price space?
I just bounced an old thread on another forum that seems to go in the same direction, but that was not answered.
http://www.W****tt.com/messageview.cfm?catid=3&threadid=64674
thanks,
m |
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I'm not active in this market but I guess the obvious thing would be to plot the implied vol surface and see what it looks like (in price space at first)
the basis issues might make it quite difficult to model in "implied yield" space, I am sure somebody somewhere is trying to do it (there might even be an arb there like there was for futures convexity correction back in the day)... |
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| As I said on the other forum, I don't think there's a way to do it properly, unless you make some relatively arbitrary simplifying assumptions. |
Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness... |
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mtsm
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| Total Posts: 94 |
| Joined: Dec 2010 |
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forget the CTD at first. imagine it is an option on a forward bond and you want to price it using a yield vol and some scaling factor.
the problem has the look and feel of a problem you encounter when pricing a european payout under a different measure from the natural measure going with some index. |
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| Sort of like a mid-curve, maybe? |
Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness... |
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you could try pricing this with multifactor BGM for the different buckets of the treasury yield curve and the discount curve, and a correlated credit component with jumps for the reinvested margin, using the Henrard model, it might however be using a sledgehammer to crack a nut
edit: since you want to take skew into account you probably need a stoch vol (SABR) LMM also |
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