Derivatives -- the View from the Trenches

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An Interest Rate Model at Work in January Best fit of model to independent swaption volatility smile data in January 2003. 4.00% 3.00% 2.00% 1.00% 0.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% -1.00% reval diff sv diff -2.00% -3.00% -4.00% On the x-axis we have the strike quoted in terms of Black- Scholes swaption delta. The y-axis reports the discrepancy between our official marks (reval) and the model (sv) to the official quotes in terms of Black-Scholes volatilities. 26
An Interest Rate Model at Work in June Using the same parameters in June 2003 against new independent data. 4.00% 3.00% 2.00% 1.00% 0.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% reval diff sv diff -1.00% -2.00% -3.00% -4.00% So the model is better at following the market smile than the trader is. 27
Page 1 and 2: Derivatives -- the View from the Tr
Page 3 and 4: My Life as a Quant CV: - 1997: PhD
Page 5 and 6: The First Fundamental Theorem of De
Page 7 and 8: Theorem 1 and Option Markets Black
Page 9 and 10: Theorem 1 and Models Theorem 1 ext
Page 11 and 12: Theorem 1 and Technical Results A
Page 13 and 14: Theorem 2: The Gospel of the Jump
Page 15 and 16: But in essence the strategies invol
Page 17 and 18: Theorem 2 and the Equity Volatility
Page 19 and 20: So in front of you, you have an opt
Page 21 and 22: The Difference between P and Q and
Page 23 and 24: Model Philosophy Keep it simple --
Page 25: Foreign exchange - Black-Scholes wi

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