Consider a lognormal Libor Market Model. For simplicity, assume that Libor rates apply over 1y periods. Take

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Consider a lognormal Libor Market Model. For simplicity, assume that Libor rates apply over 1y periods. Take current Libor rates to be flat at 3%. Using the discussion on the volatility triangle in Section 9.2.2 and the swaption approximation in Section 9.2.3, obtain the forward vol structure given the following grid of lognormal swaption vols.

Expiry/Tenor 1y 2y ly 2   20% 18% 15% 16% 14% 12%

Section 9.2.2

For convenience, let Ti = iA, i.e. the set times of our Libor rates are equally spaced apart. Let us consider


Section 9.2.3

In Section 9.2.1, we have seen that the SDE for the volatility part of the swap rate under the LMM is given

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