Calculating Volatility: A Simplified Approach
To compute XVAs accurately andefficiently, we find monthly updates for the mean reversionparameter and daily updates for the short rate volatility to bereasonable. To update the mean reversion parameter, we minimize theoverall (weighted) discrepancy between model- and market-impliedvolatilities across the at-the-money swaption volatility surfaceaway from the instruments used for the…