Compute Black volatility for LIBOR Market Model using Rebonato formula


  • outVol = blackvolbyrebonato(ZeroCurve,VolFunc,CorrMat,
  • outVol = blackvolbyrebonato(___,Name,Value) example



outVol = blackvolbyrebonato(ZeroCurve,VolFunc,CorrMat,
computes the Black volatility for a swaption using a LIBOR Market Model.


outVol = blackvolbyrebonato(___,Name,Value) computes the Black volatility for a swaption using a LIBOR Market Model with optional name-value pair arguments.


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Price Swaption for LIBOR Market Model Using the Rebonato Formula

Define the input maturity and tenor for a LIBOR Market Model (LMM) specified by the cell array of volatility function handles, and a correlation matrix for the LMM.

Settle = datenum('11-Aug-2004');

% Zero Curve
CurveTimes = (1:10)';
CurveDates = daysadd(Settle,360*CurveTimes,1);

ZeroRates = [0.03 0.033 0.036 0.038 0.04 0.042 0.043 0.044 0.045 0.046]';

% Construct an IRCurve
irdc = IRDataCurve('Zero',Settle,CurveDates,ZeroRates);

LMMVolFunc = @(a,t) (a(1)*t + a(2)).*exp(-a(3)*t) + a(4);
LMMVolParams = [.3 -.02 .7 .14];

numRates = length(ZeroRates);
VolFunc(1:numRates-1) = {@(t) LMMVolFunc(LMMVolParams,t)};

Beta = .08;
CorrFunc = @(i,j,Beta) exp(-Beta*abs(i-j));
CorrMat = CorrFunc(meshgrid(1:numRates-1)',meshgrid(1:numRates-1),Beta);

ExerciseDate = datenum('11-Aug-2009');
Maturity = daysadd(ExerciseDate,360*[3;4],1);

Vol = blackvolbyrebonato(irdc,VolFunc,CorrMat,ExerciseDate,Maturity,'Period',1)
Vol =


Input Arguments

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ZeroCurve — Zero-curve for LiborMarketModel modelstructure

Zero-curve for the LiborMarketModel, specified using IRDataCurve or RateSpec.

Data Types: struct

VolFunc — Function handle for volatilitycell array of function handles

Function handle for volatility, specified by a NumRates-by-1 cell array of function handles. Each function handle must take time as an input and return a scalar volatility

Data Types: cell | function_handle

CorrMat — Correlation matrixvector

Correlation matrix, specified by NumRates-by-NumRates.

Data Types: single | double

ExerciseDate — Swaption exercise datenonnegative integer | vector of nonnegative integers | string of dates

Swaption exercise dates, specified by a NumSwaptions-by-1 vector of serial date numbers or date strings.

Data Types: single | double | cell

Maturity — Swap maturity datenonnegative integer | vector of nonnegative integers | string of dates

Swap maturity dates, specified using a NumSwaptions-by-1 vector of dates or date strings.

Data Types: single | double | cell

Name-Value Pair Arguments

Specify optional comma-separated pairs of Name,Value arguments. Name is the argument name and Value is the corresponding value. Name must appear inside single quotes (' '). You can specify several name and value pair arguments in any order as Name1,Value1,...,NameN,ValueN.

Example: Vol = blackvolbyrebonato(irdc,VolFunc,CorrMat,ExerciseDate,Maturity,'Period',1)

'Period' — Compounding frequency of curve and reset of swaptions2 (default) | positive integer from the set [1,2,3,4,6,12] | vector of positive integers from the set [1,2,3,4,6,12]

Compounding frequency of curve and reset of swaptions, specified as a positive integers for the values 1,2,4,6,12 in a NumSwaptions-by-1 vector.

Data Types: single | double

Output Arguments

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outVol — Black volatility for specified swaptionscalar | vector

Black volatility, returned as a vector for the specified swaptions.

More About

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The Rebonato approximation formula relates the Black volatility for a European swaption, given a set of volatility functions and a correlation matrix





[1] Brigo, D. and F. Mercurio, Interest Rate Models - Theory and Practice, Springer Finance, 2006.

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