Torqueselectividad

This topic explains swaption calendar spreads and then describes how to use the associated template in SWPM to create and value swaption calendar spreads.

A calendar spread is an option strategy that involves buying and selling options on the same security with different maturities. Using calls, the calendar spread strategy can be set up by buying long term calls and simultaneously writing an equal number of near-month at-the-money, or slightly out-of-the-money, calls of the same underlying security with the same strike price. The idea behind the calendar spread is to sell time, which is why calendar spreads are also known as time spreads. The options trader hopes that the price of the underlying remains unchanged at expiration of the near month options, so that they

453 _{Applies to caps and floors. Strategies are combinations of two swaptions. It is similar to creating a portfolio of two}

expire worthless. As the time decay of near month options is at a faster rate than longer term options, the trader's long term options still retain much of their value. The trader can then either own the longer term calls for less or write more calls and repeat the process.

If the trader is bullish for the long term and is selling the near month calls with the intention to ride the long call for free, the trader is implementing the bull calendar spread strategy.

If the trader is neutral on the underlying security and is selling the near month calls primarily to earn from time decay, the trader is implementing the neutral calendar spread strategy.

You can use shortcuts (e.g., SWPM -OVCDRSPR <Go>) to access the swaption straddle template from the command line, or you can click the Products toolbar button to choose a template from a menu.

• For more information about shortcuts, see Shortcuts.

• For information about how to load templates from the toolbar, see Choosing a Template.

SWPM's swaption calendar spread template is organized into five tabs that allow you to set up and analyze the deal. You can structure and value your deal on the Main tab of the template, which is divided into three sections. You can input details of the deal in the strategy and curve/volatilities data sections, then evaluate the deal in the valuation section.

• Control Area: Allows you to navigate between tabs, analyze deals, set up scenarios, manage risk, generate trade tickets,

and configure your default settings. For more information, see Control Area.

• _{Strategy: Allows you to configure your settings for the deal, including the strategy}454_{, notional amount, currency, strike,}

effective date, swaption expiration, and tenor of the underlying swap (e.g., 1 YR [to expiration] x 5 YR [swaption tenor]). The calendar spread template launches with a long receiver and short payer swaption calendar spread strategy, using ATM rates as the strike for the underlying 5Y swap. You can click the Detail field to see the configuration of the underlying swap in SWPM. For information about a field, position your cursor over it or see Definitions.

454 _{Applies to caps and floors. Strategies are combinations of two swaptions. It is similar to creating a portfolio of two}

• Curve/Volatility Data: Allows you to update the curves and volatilities that SWPM uses to discount cashflows and

project forward pricing when calculating the Market Value of the deal. The Vol Cube drop-down menu allows you to choose between Flat volatility (manual input) and volatilities from the Volatility Cube (VCUB) function.

SWPM calculates the market value of the deal using the curve and volatilities selected in this section at the market close of the day indicated in the Curve Date field. The Valuation date is the date at which future cashflows are discounted.

Note: By default, SWPM prices swaps as of today, i.e., the default curve date is the current date. To price swaps as of a historical date, you must backdate the Curve Date and Valuation fields. For example, to mark to market at quarter's end, you can enter the historical quarter-end date in both the Curve Date and Valuation fields. For more information, see Backdating the Valuation.

— For information about a field, position your cursor over it or see Definitions. — For information about VCUB, see VCUB <Help>.

— For information about how to update the curves that appear by default, see Setting a Source Curve. • Valuation: Allows you to analyze the market value and sensitivity of the deal.

You can further analyze swaption calendar spreads by selecting another tab from the control area. Additionally, you can save your deal by selecting Actions > Save from the toolbar. Once you save the deal, you can access it from other Bloomberg functions or through Bloomberg's API by entering the deal number followed by the <CORP> key. For example, this allows you to download the cashflow schedule for an individual leg to Microsoft® Excel with Bloomberg's API.

• For information about the other tabs that appear on the template, see SWPM Tabs. • For more information about saving deals, see Saving Deals.

• For examples of using the template to price a plain vanilla swap, see Example: Solving for Spread and Example: Solving for

Price.

• For information about Bloomberg's API, see DAPI <Help>.

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