A bridge between mortgage TBA options and swaptions

In the interest rate derivatives markets, options are usually quoted in Black volatilities. However, Black volatilities are measured differently for different instruments. For example, they are measured by the lognormal yield1 volatility in swaptions but by the lognormal price volatility in mortgage to-be-announced (TBA) options, which are bond options. Many dealers also quote swaptions in basis-point (BP) volatility, which is derived under the assumption that swap rates are normally distributed

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