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Cms volatility

Paul Bird

Joined
3/27/08
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I need to price some Cms linked bond note (e.g. a note that pays the 10y-2y with a 2% floor) . for the pricing of the floor option I use the Black formula, but I need the volatility of the underlying (so the volatility of the 10y-2y cms). How can I estimate it? Is it possible to use an implied volatility?

Tks

PaulBird
 
Although not a direct answer to your question, you may want to read literature by Patrick Hagan (some of which is available on Wilmott library and over the internet in general) about the convexity adjustment and timing issues: Black's formula may give only an approximation, and I am sure that most IR desks would use some form of convexity adjustment for sure.

About estimating vols, I would probably think about using a vol surface instead of directly using implied vols -- I am sure it's not an easy task, but Bloomberg may have relevant data!

Hope this helps.
 
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