Pricing Swaptions and Bond Options by Using One Volatility Surface

Options belong to a class of investments known as derivatives, because their value is derived from the

value of an underlying asset that the option holder has the right to buy or sell. Their pricing models

generally require at least the volatility of the underlying asset (eq. swap rate, bond price). We want to

focus on developing a model that allows us to apply the volatility of one type of option to another, by

taking into consideration the different behaviour of the underlying. The result will lead to a

comparative methodology of two different products (swaptions and bond options). With these results,

the investor will be able to hedge one of these instruments against the other. Moreover, such analysis

will lead to strategies for relative trading. By comparing prices, the financial institution will be able to

determine which investment has the highest expected return and also arrive at a decision of trading in

one product over another.

Faculty Supervisor:

Huaxiong Huang

Student:

Partner:

TD Securities (Toronto, ON)

Discipline:

Mathematics

Sector:

Finance and Insurance

University:

York University

Program:

Accelerate

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Mitacs Partners