Cutting Edge introduction: viva cross-vegas

Viva cross-vegas


Traditional models for pricing single-rate derivatives only look at their sensitivity to the implied volatility of the underlying rate – known as vega – in the same way that a single-stock equity option would typically be modelled. But fixed-income instruments are not like equities – no rate is an island, but instead exists within a term structure, subject to strict no-arbitrage requirements – and this means vega calculation is not quite as straightforward.

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