How To Fix RY489 - Cannot determine volatility with vanna-volga method

SAP Error Message - Details

• Message type: E = Error

• Message class: RY - Messages for RM Basis

• Message number: 489

• Message text: Cannot determine volatility with vanna-volga method

What causes this issue?

You are using a volatility type with moneyness definition <LS>Option
Delta</> and you have set the volatility smile construction method to
<LS>Vanna-Volga Approximation</> in the evaluation type.
The system was not able to determine a volatility to be used in the
option valuation. This can have several possible reasons:
No market data was found for one of the required volatilities used in
the smile construction. The required market data is:
25% delta call volatility (moneyness value 0.25)
At-the-money volatility (moneyness value 0.5)
25% delta put volatility (moneyness value 0.75 or -0.25)
Numerical error in the vanna-volga equation due to invalid input

System Response

The system tries using the at-the-money-volatility. If it cannot find
the at-the-money volatility, then, instead of using the central
volatility database, it tries to find a volatility in the
underlying-specific volatility database without moneyness. As a
consequence, the volatility smile effect is ignored.

How to fix this error?

Check the market data for completeness.

Procedure for System Administrators

The system issues an error message and will not allow you to continue with this transaction until the error is resolved.

Error message extract from SAP system. Copyright SAP SE.

Smart SAP Assistant

• What is the cause and solution for SAP error message RY489 - Cannot determine volatility with vanna-volga method ?

  The SAP error message RY489, which states "Cannot determine volatility with vanna-volga method," typically occurs in the context of financial derivatives pricing, particularly when using the Vanna-Volga method for calculating implied volatility. This method is often used for pricing options, especially in foreign exchange markets.
  Cause:
  The error can arise due to several reasons:
  
  
  Missing Market Data: The Vanna-Volga method requires specific market data, such as spot rates, forward rates, and volatility surfaces. If any of this data is missing or incorrectly configured, the calculation cannot proceed.
  
  
  Inconsistent Data: If the input data (like strikes, maturities, or market quotes) is inconsistent or does not align with the expected format, the method may fail to compute the volatility.
  
  
  Model Parameters: The parameters used in the Vanna-Volga model may not be set correctly. This includes the calibration of the model to the market data.
  
  
  Configuration Issues: There may be issues with the configuration of the financial instruments or the settings in the SAP system that prevent the Vanna-Volga method from executing properly.
  
  
  Solution:
  To resolve the RY489 error, consider the following steps:
  
  
  Check Market Data: Ensure that all required market data is available and correctly entered in the system. This includes spot rates, forward rates, and any other necessary inputs.
  
  
  Validate Input Parameters: Review the parameters used in the Vanna-Volga method. Make sure they are correctly set and calibrated to the current market conditions.
  
  
  Review Configuration: Check the configuration settings in SAP for the financial instruments you are working with. Ensure that they are set up correctly to use the Vanna-Volga method.
  
  
  Consult Documentation: Refer to SAP documentation or help resources for specific guidance on the Vanna-Volga method and its implementation in your version of SAP.
  
  
  Contact Support: If the issue persists, consider reaching out to SAP support or your internal IT team for further assistance. They may have more insights into specific configurations or known issues.
  
  
  Related Information:
  
  Vanna-Volga Method: This is a popular method for estimating implied volatility in options pricing, particularly in FX markets. It combines the use of the Black-Scholes model with adjustments based on the observed market data.
  Implied Volatility: Understanding how implied volatility is derived and its significance in options pricing can help in troubleshooting related issues.
  SAP Financial Modules: Familiarize yourself with the specific SAP modules you are using (e.g., SAP Treasury and Risk Management) as they may have unique configurations or requirements.
  
  By following these steps, you should be able to diagnose and resolve the RY489 error effectively.