Implied Volatility Surfaces
Financial-Risk-Manager's Position-Manager module includes an interface to Implied
Volatility Surface Manager module for all derivative products.
Implied Volatility Surface Manager module is context-sensitive.
The type of volatility
surface defined depends on the instrument type processed.
If you
enter IV Surface Manager module directly, you will be asked to select the
Type of Surface and the underlying asset class.
If a volatility surface for the asset type and risk factors (Currency Pairs, Equity, Commodity, Yield Curve, etc) is already defined in the database you will be able to edit this surface directly, else you will be asked to create a new surface.)
Creating Your first Volatility Surface.
Creating a surface is very simple, as the module simply expands the assumed volatility as single point and offers to split each ATM/Expiration volatility into a Grid of volatilities. (usually assumed to be the forward At-The-Money strike of the option's expiration date, or the ATM strike of the option's expiration data AND Maturity for Interest Rate Related products with specific maturities.
You are then offered the possibility to split your ATM and Expiration Data into multiple Strikes and Expirations. (or Strikes,/Expirations/Maturities).
by "stretching" your grid into more points.
In the case of interest rate products, the interface is relatively more complex, as multiple maturities create a vortex instead of a grid. Therefore each new Maturity, create a new copy of the grid. To facilitate display, each maturity Strike Vs Expiration is contained in a maturity Tab.
Types of Volatility Surfaces Covered.
| Surfaces with Expirations Vs Strikes (Grid or Matrix) | |
| Equity Surfaces |
|
| Commodity Surfaces |
|
| Foreign-Exchange Surfaces |
|
| Surfaces with Maturities (Vortex or Grid of Grid / Matrix Table) | |
| Equity Stream surfaces |
|
| Commodity Stream surfaces |
|
| Swaptions |
|
| Caps/Floors or Collars | |
| Basis Swaptions | |
| Constant Maturity Swaptions | |
| Constant Maturity Caps/Floors or Collars | |
| Credit Default Swap Options Surfaces |
Get-Started: Entering your First Implied Volatility Surface
First, load the trade entry screen.
- From the main Trading Board, click on Position.
- To go to the Main Trading Board, select the Main Menu.
- Select a Fixed Income Instrument. Derivative. In this example we will use a Swaption.
- Select Swaption
- Click on the
volatility button. Warning: This button contains three separate
buttons/options.
The left hand button computes the underlying volatility according to the trade's terms and conditions. If you click on this button, the module will take.
1) the option's underlying risk factor.
2) the option expiration date
3) the product's maturity (if a maturity is expected)
It will then compute the Historical volatility with or without decay factor and cutoff from the Volatility Calculator.
The middle button is the historical volatility calculator: The Volatility Calculator computes volatility of the underlying asset according to start and end date, decay and cutoff of the volatility calculator.
Note: If you haven't supplied an option expiration data and you request a volatility from the left button, it will use the start date. If an option expiration is available it will use that data as the period to sample data.
The Right hand button is your access to the Implied Volatility Surface Manager.