RT Journal Article
SR Electronic
T1 Risk-Managing Bermudan Swaptions in a LIBOR Model
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 51
OP 62
DO 10.3905/jod.2004.391035
VO 11
IS 3
A1 Raoul Pietersz
A1 Antoon Pelsser
YR 2004
UL https://pm-research.com/content/11/3/51.abstract
AB Estimating the sensitivity of swaption values to volatility changes is tricky, because there are many different ways the volatility function may be deformed that give rise to the same change in overall variance. The authors show how a standard recalibration based on perturbing forward rate volatilities and simulating the changes in swaption values the “time homogeneous forward rate volatility” approach can lead to substantial uncertainty in swap vegas. They propose an alternative technique based on time homogeneity of swap rate volatility, which performs much better because it distributes the effect of the perturbation more smoothly across maturities. This allows more accurate swap vega estimates using many fewer Monte Carlo runs.