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ronin


Total Posts: 601
Joined: May 2006
 
Posted: 2020-05-18 22:21
> How does one calibrates a model for a, say, CMS steepener?

Well, last time I traded that stuff - which would have been around the time of the original question - you typed "VCAP" in your Reuters terminal and looked for the tenor pair that you were interested in.

Facetiousness aside, let's assume you meant "in a currency in which there is no liquid market in CMS steepeners".

You take a step back. The actual question is "how would I hedge a CMS steepener with this set of liquid instruments".

Once you can answer that, the modelling part is reasonably straightforward.

"There is a SIX am?" -- Arthur

pj


Total Posts: 3535
Joined: Jun 2004
 
Posted: 2020-05-19 10:08
> "how would I hedge a CMS steepener with this set of liquid instruments"
I concur.
And how should be this answered?

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

ronin


Total Posts: 601
Joined: May 2006
 
Posted: 2020-05-19 12:51
> And how should be this answered?

Again, with all the caveats.

Say 2-10 steepener, 3y forward.

You are exposed to the 3-2 and 3-10 deltas, 3-2 and 3-10 vegas.

And then the correl delta, which you can get if you add 5-5 vega to the mix. But that gives you some 5-5 delta which you also need to flatten.

So I would worry about calibrating to three forwards and three swaptions.

"There is a SIX am?" -- Arthur

pj


Total Posts: 3535
Joined: Jun 2004
 
Posted: 2020-05-19 14:00
It is precisely what I need.
Thank you very much, ronin!

The older I grow, the more I distrust the familiar doctrine that age brings wisdom Henry L. Mencken

ronin


Total Posts: 601
Joined: May 2006
 
Posted: 2020-05-19 19:51
Sorry, been typing faster than thinking...

The additional vega/delta is 5-8, not 5-5. It's the gap between the 3-2 and 3-10. It should start when the 3-2 expires (start 5), and end when the 3-10 ends (tenor 8, not 5).

The basic idea being that you are forming the triangle, so the correl comes out of the three vols.

"There is a SIX am?" -- Arthur
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