Pricing a Bermudan Swaption with a Short Rate Lattice Method

This paper presents the tree construction approach to pricing a Bermudan swaption. The Bermudan swaption is an option, which at each date in a schedule of exercise dates gives the holder the right to enter an interest swap, provided that this right has not been exercised at any previous time in the schedule. Assuming a common diffusion short rate dynamics, the Hull-White model, we propose a dynamic programming approach for their risk neutral evaluation. This framework is suited to a calibration from an observed initial yield curve and market price data of discount bonds and European swaptions.Bermudan swaption, swap rate, risk neutral evaluation, dynamic programming, Hull-White model, calibration.

Various Features of the Chooser Flexible Cap

In this paper, we theoretically look into various features of a chooser flexible cap. The chooser flexible cap is a financial instrument written on an underlying market interest rate index, LIBOR (London Inter-Bank Offer Rate). The chooser flexible cap allows a right for a buyer to exercise a limited and pre-determined number of the interim period caplets in a multiple-period cap agreement. While the chooser flexible cap is more flexible and cheaper instrument than the normal cap, its pricing is more complicated than the cap's because of its flexibility. So it may take long time for its price calculation. We can use the features to cut down the calculation time. At the same time the option holder can use the features for exercise strategies.chooser flexible cap, LIBOR, dynamic programming, exercise strategy.

Pricing of a Chooser Flexible Cap and its Calibration

In this paper, we deal with no-arbitrage pricing problems of a chooser flexible cap (floor) written on an underlying LIBOR. The chooser flexible cap (floor) allows a right for a buyer to exercise a limited and pre-determined number of the interim period caplets (floorlets) in a multiple-period cap (floor) agreement. Assuming a common diffusion short rate dynamics, e.g., Hull-White model, we propose a dynamic programming approach for their risk neutral evaluation. This framework is suited to a calibration from an observed initial yield curve and market price data of discount bonds, caplets, and floorlets.chooser flexible cap, LIBOR, dynamic programming, Hull-White model, calibration.

PRICING AND CALIBRATION OF A CHOOSER FLEXIBLE CAP

In this paper, we deal with no-arbitrage pricing problems of a chooser flexible cap written on an underlying LIBOR. The chooser flexible cap allows a right for a buyer to exercise a limited and pre-determined number of the interim period caplets in a multiple-period cap agreement. Assuming a common diffusion short rate dynamics, e.g., Hull–White model, we propose a dynamic programming approach for their risk neutral evaluation. This framework is suited to a calibration from an observed initial yield curve and market price data of discount bonds, caplets, and floorlets.Chooser flexible cap, LIBOR, dynamic programming, Hull–White model, calibration