ABSTRACT
Most banks continuously monitor interest rate market data and after stripping, interpolating, and massaging it, present the processed data as market objects (in the programming sense) ready to be used in pricing algorithms. Typically the object will incorporate yieldcurve and volatility information for a given currency and particular sector (like Treasuries or swaps or municipals in USD). So in this chapter we assume volatility information is available in the form
of interpolated swaption and stripped caplet implied volatilities entered in a quarterly implied volatility matrix with exercise times descending row-by-row and tenors moving left to right along the columns. If data is available awayfrom-the-money it is entered into identical but separate volatility matrices referenced either by absolute strike or relative delta strike, the whole making up an implied volatility cube.
