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Hi - I have posted this under "Quant Matters" although wasn't sure if it would bemore appropriate here.
Any help would be fantastic - I'm struggling as have no one to throw ideas around with.
Hi All,
I have decided to write my dissertation on how you can add a conditionality element to a floor spread. I want to look at how you can get realised correlation from CMS spread options and use this condition in your floor option. i.e to sell correlation for example to cheapen the trade and allow you to implement a view rather than just receiving a rate or implementing a butterfly spread for example.
I have seen a number of papers on pricing CMS Spread Options using the Libor Market Model - is this the same as the Black Normal Model - and if so what is the difference between that and Black Sholes Model I would have been taught in class? I think it has to do with instead with equity you use the spot price of a stock - for IR you use the discounted log normal futures price?)
To get the correlation element for pricing i can use observables from the price of CMS spread options using the vol of spread options, and the vol of the individual swaptions. (i.e spread on 2 year 30 year and 2 year vol, 30 year vol to back out the implied correlation by the market on 2yr 30yr rates)
My question is whether there is another way to get realised correlation from the market? How can I compare this with implied correlation and how do i get implied correlations? (Look at forward rates and look at the correlation between these?) (Or have I got something wrong here?)
Are there any other models I could incorporate to price this structure to make this dissertation more interesting and to incorporate some more modelling? (Unfortunately I have only ever used Excel for modelling and a small project in R and SPSS for my undergrad so my programming skills are very limited)
I am currently struggling to get going and feel like I need to bounce ideas off people so any help or questions would be much appreciated.
Any help would be fantastic - I'm struggling as have no one to throw ideas around with.
Hi All,
I have decided to write my dissertation on how you can add a conditionality element to a floor spread. I want to look at how you can get realised correlation from CMS spread options and use this condition in your floor option. i.e to sell correlation for example to cheapen the trade and allow you to implement a view rather than just receiving a rate or implementing a butterfly spread for example.
I have seen a number of papers on pricing CMS Spread Options using the Libor Market Model - is this the same as the Black Normal Model - and if so what is the difference between that and Black Sholes Model I would have been taught in class? I think it has to do with instead with equity you use the spot price of a stock - for IR you use the discounted log normal futures price?)
To get the correlation element for pricing i can use observables from the price of CMS spread options using the vol of spread options, and the vol of the individual swaptions. (i.e spread on 2 year 30 year and 2 year vol, 30 year vol to back out the implied correlation by the market on 2yr 30yr rates)
My question is whether there is another way to get realised correlation from the market? How can I compare this with implied correlation and how do i get implied correlations? (Look at forward rates and look at the correlation between these?) (Or have I got something wrong here?)
Are there any other models I could incorporate to price this structure to make this dissertation more interesting and to incorporate some more modelling? (Unfortunately I have only ever used Excel for modelling and a small project in R and SPSS for my undergrad so my programming skills are very limited)
I am currently struggling to get going and feel like I need to bounce ideas off people so any help or questions would be much appreciated.