optfloatbyhjm

Price options on floating-rate notes for Heath-Jarrow-Morton interest-rate tree

Syntax

[Price,PriceTree] = optfloatbyhjm(HJMTree,OptSpec,Strike,ExerciseDates,AmericanOpt,Spread,Settle,Maturity)

[Price,PriceTree] = optfloatbyhjm(___,Name,Value)

Description

[Price,PriceTree] = optfloatbyhjm(HJMTree,OptSpec,Strike,ExerciseDates,AmericanOpt,Spread,Settle,Maturity) prices options on floating-rate notes from a Heath-Jarrow-Morton interest rate tree. optfloatbyhjm computes prices of options on vanilla floating-rate notes.

[Price,PriceTree] = optfloatbyhjm(___,Name,Value) adds optional name-value pair arguments.

Examples

Compute the Price of American and European Call Options on a Floating-Rate Note

Define the interest-rate term structure.

Rates = [0.03;0.035;0.040;0.045];
ValuationDate = 'Jan-1-2012';
StartDates = {'Jan-1-2012'; 'Jan-1-2013'; 'Jan-1-2014'; 'Jan-1-2015'};
EndDates = {'Jan-1-2013'; 'Jan-1-2014'; 'Jan-1-2015'; 'Jan-1-2016'};
Compounding = 1;

Create the RateSpec.

RateSpec = intenvset('ValuationDate', ValuationDate, 'StartDates', StartDates,...
'EndDates', EndDates, 'Rates', Rates, 'Compounding', Compounding)

RateSpec = struct with fields:
           FinObj: 'RateSpec'
      Compounding: 1
             Disc: [4x1 double]
            Rates: [4x1 double]
         EndTimes: [4x1 double]
       StartTimes: [4x1 double]
         EndDates: [4x1 double]
       StartDates: [4x1 double]
    ValuationDate: 734869
            Basis: 0
     EndMonthRule: 1

Build the HJM tree.

VolSpec = hjmvolspec('Constant', 0.01);
TimeSpec = hjmtimespec(RateSpec.ValuationDate, EndDates, Compounding);
HJMTree = hjmtree(VolSpec, RateSpec, TimeSpec)

HJMTree = struct with fields:
      FinObj: 'HJMFwdTree'
     VolSpec: [1x1 struct]
    TimeSpec: [1x1 struct]
    RateSpec: [1x1 struct]
        tObs: [0 1 2 3]
        dObs: [734869 735235 735600 735965]
        TFwd: {[4x1 double]  [3x1 double]  [2x1 double]  [3]}
      CFlowT: {[4x1 double]  [3x1 double]  [2x1 double]  [4]}
     FwdTree: {[4x1 double]  [3x1x2 double]  [2x2x2 double]  [1x4x2 double]}

The floater instrument has a spread of 10, a period of one year, and matures on Jan-1-2015.

Spread = 10;
Settle = 'Jan-1-2012';
Maturity =  'Jan-1-2015';
Period = 1;

Define the option for the floating-rate note.

OptSpec = {'call'};
Strike = 95;
ExerciseDates = 'Jan-1-2015';
AmericanOpt = [0;1];

Compute the price of the call options.

Price= optfloatbyhjm(HJMTree,  OptSpec, Strike, ExerciseDates,AmericanOpt,...
Spread, Settle, Maturity)

Price = 2×1

    4.5098
    5.2811

Input Arguments

HJMTree — Interest-rate tree structure

binomial tree structure

Interest-rate tree specified as a structure by using hjmtree.

Data Types: struct

OptSpec — Definition of option

character vector | cell array of character vectors

Definition of option as 'call' or 'put' specified as a NINST-by-1 cell array of character vectors for 'call' or 'put'.

Data Types: cell | char

Strike — Option strike price values

nonnegative integer | vector of nonnegative integers

Option strike price values specified nonnegative integers using as NINST-by-NSTRIKES vector of strike price values.

Data Types: single | double

ExerciseDates — Exercise date for option (European, Bermuda, or American)

serial date number | vector of serial date numbers | date character vector | cell array of date character vectors

Exercise date for option (European, Bermuda, or American) specified as serial date numbers or date character vectors using a NINST-by-NSTRIKES or NINST-by-2 vector of for the option exercise dates.

• If a European or Bermuda option, the ExerciseDates is a 1-by-1 (European) or 1-by-NSTRIKES (Bermuda) vector of exercise dates. For a European option, there is only one ExerciseDate on the option expiry date.

• If an American option, then ExerciseDates is a 1-by-2 vector of exercise date boundaries. The option exercises on any date between or including the pair of dates on that row. If there is only one non-NaN date, or if ExerciseDates is 1-by-1, the option exercises between the Settle date and the single listed ExerciseDate.

Data Types: double | char | cell

AmericanOpt — Option type

scalar | vector of positive integers[0,1]

Option type specified as NINST-by-1 positive integer scalar flags with values:

• 0 — European/Bermuda

• 1 — American

Data Types: single | double

Spread — Number of basis points over the reference rate

nonnegative integer | vector of nonnegative integers

Number of basis points over the reference rate specified as a vector of nonnegative integers for the number of instruments (NINST)-by-1).

Data Types: single | double

Settle — Settlement dates of floating-rate note

ValuationDate of HJM tree (default) | serial date number | vector of serial date numbers | date character vector | cell array of date character vectors

Settlement dates of floating-rate note specified as serial date numbers or date character vectors using a NINST-by-1 vector of dates.

Note

The Settle date for every floating-rate note is set to the ValuationDate of the HJM tree. The floating-rate note argument Settle is ignored.

Data Types: double | cell | char

Maturity — Floating-rate note maturity date

serial date number | vector of serial date numbers | date character vector | cell array of date character vectors

Floating-rate note maturity date specified as serial date numbers or date character vectors using a NINST-by-1 vector of dates.

Data Types: double | cell | char

Name-Value Pair Arguments

Specify optional comma-separated pairs of Name,Value arguments. Name is the argument name and Value is the corresponding value. Name must appear inside quotes. You can specify several name and value pair arguments in any order as Name1,Value1,...,NameN,ValueN.

Example: [Price,PriceTree] = optfloatbyhjm(HJMTree,OptSpec,Strike,ExerciseDates,AmericanOpt,Spread,Settle,Maturity,'FloatReset',4,'Basis',7)

'FloatReset' — Frequency of payments per year

1 (default) | positive integer from the set[1,2,3,4,6,12] | vector of positive integers from the set [1,2,3,4,6,12]

Frequency of payments per year, specified as the comma-separated pair consisting of 'FloatReset' and positive integers for the values [1,2,3,4,6,12] in a NINST-by-1 vector.

Note

Payments on floating-rate notes (FRNs) are determined by the effective interest-rate between reset dates. If the reset period for an FRN spans more than one tree level, calculating the payment becomes impossible due to the recombining nature of the tree. That is, the tree path connecting the two consecutive reset dates cannot be uniquely determined because there will be more than one possible path for connecting the two payment dates.

Data Types: double

'Basis' — Day-count basis of the instrument

0 (actual/actual) (default) | positive integers of the set [1...13] | vector of positive integers of the set [1...13]

Day-count basis of the instrument, specified as the comma-separated pair consisting of 'Basis' and a positive integer using a NINST-by-1 vector. The Basis value represents the basis used when annualizing the input forward-rate tree.

• 0 = actual/actual

• 1 = 30/360 (SIA)

• 2 = actual/360

• 3 = actual/365

• 4 = 30/360 (PSA)

• 5 = 30/360 (ISDA)

• 6 = 30/360 (European)

• 7 = actual/365 (Japanese)

• 8 = actual/actual (ICMA)

• 9 = actual/360 (ICMA)

• 10 = actual/365 (ICMA)

• 11 = 30/360E (ICMA)

• 12 = actual/365 (ISDA)

• 13 = BUS/252

For more information, see Basis.

Data Types: double

'Principal' — Principal values

100 (default) | vector of nonnegative values | cell array of nonnegative values

Principal values, specified as the comma-separated pair consisting of 'Principal' and nonnegative values using a NINST-by-1 vector or NINST-by-1 cell array of notional principal amounts. When using a NINST-by-1 cell array, each element is a NumDates-by-2 cell array where the first column is dates and the second column is associated principal amount. The date indicates the last day that the principal value is valid.

Data Types: double | cell

'Options' — Structure containing derivatives pricing options

structure

Structure containing derivatives pricing options, specified as the comma-separated pair consisting of 'Options' and a structure obtained from using derivset.

Data Types: struct

'EndMonthRule' — End-of-month rule flag

1 (in effect) (default) | nonnegative integer [0,1]

End-of-month rule flag, specified as the comma-separated pair consisting of 'EndMonthRule' and a nonnegative integer [0, 1] using a NINST-by-1 vector. This rule applies only when Maturity is an end-of-month date for a month having 30 or fewer days.

• 0 = Ignore rule, meaning that a bond coupon payment date is always the same numerical day of the month.

• 1 = Set rule on, meaning that a bond coupon payment date is always the last actual day of the month.

Data Types: double

Output Arguments

Price — Expected prices of the floating-rate note option at time 0

scalar | vector

Expected prices of the floating-rate note option at time 0 is returned as a scalar or an NINST-by-1 vector.

PriceTree — Structure of trees containing vectors of option prices at each node

tree structure

Structure of trees containing vectors of instrument prices and accrued interest and a vector of observation times for each node returned as:

• PriceTree.PBush contains the clean prices.

• PriceTree.AIBush contains the accrued interest.

• PriceTree.tObs contains the observation times.

More About

Floating-Rate Note Options

A floating-rate note option is a put or call option on a floating-rate note.

Financial Instruments Toolbox™ supports three types of put and call options on floating-rate notes:

• American option — An option that you exercise any time until its expiration date.

• European option — An option that you exercise only on its expiration date.

• Bermuda option — A Bermuda option resembles a hybrid of American and European options; you can only exercise it on predetermined dates, usually monthly.

For more information, see Floating-Rate Note Options.