Skip to content
All library documents

Reading Upper-Left Volatility in Swaption Surfaces

Article Quant Q&A · Author: SnackOverflow
Read the original

Summary

In swaption quoting conventions, a volatility surface is often arranged with option expiry increasing down the first column and the maturity of the underlying swap increasing across the top row. Under that layout, the upper-left region represents options with both short expiries and short underlying swap maturities. A rise in volatility there indicates higher implied volatility for that part of the surface.

The phrase depends on how the surface is displayed, so the axes should be checked before interpreting “upper left.” The answer notes that dealers may swap which dimension is shown in rows or columns; their stated convention still leads to the same interpretation. The document offers a brief explanation of terminology rather than empirical analysis or a general rule about other volatility surfaces.

Key ideas

  • Swaption surfaces commonly list expiry from earliest to latest down the rows.
  • Underlying swap maturity often increases from shortest to longest across columns.
  • The upper-left region then refers to short-expiry options on short-maturity swaps.
  • Check the surface layout because upper-left has no universal meaning across displays.

Tags

Fixed incomeOptionsVolatility
Full text
# What is upper left vol?


# What is upper left vol?












First time question, so please let me know if you have feedback for how I am asking.

I am reading a market research piece and it makes reference to the performance of "vol, particularly the upper left and low strike receivers".

I've poked around looking for information on what that means. My understanding is that the volatility surface has x-axis of time to maturity, y-axis of implied vol, and z-axis of strike price. Should I infer that the 'upper left' vol would mean high implied vol with low time to maturity?

Thanks!

## Answer by AlRacoon (score 5, accepted)

https://quant.stackexchange.com/a/46179

In swaptions, there is the expiration of the swaption into an underlying swap. When the dealers provide the vol surface, in the first column, they typically put the expiry of the swaption from earliest to farthest. Along the top row, they put maturity of the underlying swap from shortest to farthest. So when the dealers describe the upper left having high implied vol, they are saying short dated/expiry options on short maturity underlying swaps have been going up.

Of course, some dealers might show the swaption maturity on the row and the underlying swap on the column, but this would yield the same interpretation of the upper left.

Below is a snapshot of swaption vol from bloomberg demonstrating this phenomenon.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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