Industry WIKI

A swaption (a portmanteau of "swap" and "option") is an option granting its owner the right but not the obligation to enter into an underlying swap on specified terms at a future date. In practice the term is most commonly used for options on interest rate swaps, where the holder has the right to enter into a fixed-for-floating interest rate swap.

The trinomial tree is a lattice-based computational model used in financial mathematics to price options on equity. It was developed by Phelim Boyle in 1986. It is an extension of the binomial options pricing model, and is conceptually similar. It can also be shown that the approach is equivalent to the explicit finite difference method for option pricing.

Volatility smiles are implied volatility patterns that arise in pricing financial options. It is a parameter (implied volatility) that needs to be modified for the Black–Scholes formula to fit market prices. Generally, for a given expiration, options whose strike price differs substantially from the underlying asset's forward price tend to have prices that deviate from their expected pri