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Swaptions: 1 price, 10 deltas, and... 6 1/2 gammas

Marc Henrard ()

Finance from University Library of Munich, Germany

Abstract: In practice the option pricing models are calibrated to market prices of liquid instruments. Consequently for those instruments, all the models give the same price. But the computed risk can be widely different. The note proposes comparison on simple instruments (swaptions) on a simple risk measure (first and second order sensitivity to the underlying yield curve). The main paper conclusion is that the hedging widely (up to 10\% of the underlying risk) between the model, specially with their dynamic. The shape of the smile has also an impact but to a lesser extend.

Keywords: Swaption; delta; hedging; in-the-model; out-of-the-model sensitivity; models difference (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-cmp
Date: 2004-07-22, Revised 2005-09-27
Note: Type of Document - pdf; pages: 13. 13 pages, pdf Draft document, comments welcome
References: View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

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