Central Volatility Database 

Use

You use the central volatility database to store volatility structures that you want to use in evaluations.

Volatilities in the central volatility database are defined in the master dataset Volatility name. Volatility profiles are assigned to this master dataset. These profiles control the following volatility properties, which are used to store the volatility.

·       Term of the option

·       Term of the underlying transaction

·       Moneyness of the option

Prerequisites

In Customizing under SAP Banking ® SEM Banking ® Data Pool ® Price Parameters ® Statistical Data ® Volatilities with Moneyness, you need to have already entered the master data for the volatilities.

Features

A volatility master dataset can be assigned to a transaction in Risk Analysis via an evaluation rule. Every option can therefore be linked to an individual volatility master dataset. Alternatively, a default assignment can be made concurrent with the existing volatilities using corresponding underlying transactions. You enter this default assignment in Customizing under SAP Banking ® SEM Banking ® Data Pool ® Price Parameters ® Statistical Data ® Volatilities with Moneyness ® Volatilities – Assign Underlying Instrument.

Finding Volatilities

The system uses the following rules during the valuation process in order to find volatilities:

...

      1.      The volatility name is stored directly in the valuation rule.

      2.      If this is not the case, the system checks whether the volatility name comes from the underlying transaction.

      3.      If there is also no volatility name in the underlying, the system takes the volatility type in the valuation rule.

      4.      If this is not available, the system takes the default volatility type stored in the evaluation type.

Interpolation

If you have not stored your own BAdI implementation in Customizing under SAP Banking ® SEM Banking ® Data Pool ® Price Parameters ® Statistical Data ® Volatilities with Moneyness ® Define Interpolation of Volatilities, then the system uses the nearest neighbor search. In this method, the system selects a volatility value from the volatility database that has a combination of parameter values that are the closest match to the parameter values transferred. The distance between two points in the volatility data cube is calculated as follows: Firstly, the relative deviation is calculated for each dimension (term of the underlying, term of the option, moneyness). For the residual maturity of the option, and for the residual maturity of the underlying, this is the difference in days divided by the value that was transferred for the respective residual maturity. The total distance is the total of the relative deviation in the moneyness and the relative deviations of both residual maturities. For the combination of parameters that the system is looking for, the system calculates this distance for all points within the volatility data cube, and then selects the volatility of the neighbor with the smallest distance as the interpolated value.