Matching Swaption Volatility Types to Pricing Engines

Summary

The document describes an implementation issue when connecting a normal volatility surface to a swaption pricing engine. The example constructs a swaption volatility matrix using normal volatilities, then passes it to a Black swaption engine. The reported error says that this engine expects shifted lognormal input volatility, exposing a mismatch between the volatility convention used by the surface and the convention required by the pricer.

The useful concept is that a volatility surface and its pricing engine must use compatible volatility assumptions. The post does not provide a fix, compare alternative engines, or establish whether manually extrapolating quotes would resolve the problem. It is a question rather than a worked solution, so readers should treat the error as a prompt to check the engine's supported volatility type and the surface configuration before changing data or extrapolation behavior.

Key ideas

• A Black swaption engine expects shifted lognormal volatility input.
• The example volatility matrix is configured with normal volatility.
• The error points to an incompatibility between the surface convention and the pricing engine.
• The document raises manual extrapolation as a question but does not answer it.

Tags

# Unable to link volatility structure to swaption pricing engine


# Unable to link volatility structure to swaption pricing engine












Good morning,

I am trying to link the volatility surface to my swaption pricing engine.

```
swaptionVolMatrix = ql.SwaptionVolatilityMatrix(calendar, rollConvention, optionTenors, swapTenors, ql.Matrix(normal_vols),dayCountConvention, False, ql.Normal)
#Matrix is a 8x6 shape

swaptionVolHandle = ql.SwaptionVolatilityStructureHandle(swaptionVolMatrix)
swaptionVolHandle.enableExtrapolation()
```

I get the following error:

```
RuntimeError: BlackSwaptionEngine requires (shifted) lognormal input volatility here:

blackEngine = ql.BlackSwaptionEngine(discountingTermStructure, swaptionVolHandle)
```

I have tried to follow this from the documentation:

Do I need to extrapolate manually first then? And insert just the quote value?

Thanks in advance!

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.