ronin
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> 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 |
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pj
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> "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 |
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ronin
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| Total Posts: 591 |
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> 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 |
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pj
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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 |
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ronin
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| Total Posts: 591 |
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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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