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Re: [Quantlib-dev] Pricing Callable Capped Floaters within a HullWhite Tree
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From: Guowen H. <GH...@dt...> - 2006-07-19 19:11:20
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One other thing you might want to take into consideration will be the call notice effect, this would have big impact on the simulated. Also, the call notice days may be different for different issuers1. Guowen "Toyin Akin" <toy...@ho...> 07/19/2006 02:52 PM To Guowen Han <GH...@dt...> cc qua...@li... Subject Re:Pricing Callable Capped Floaters within a HullWhite Tree Hey Guowen, Thanks for the tip. The dirty pricing bit is a big help for structures whose start date is in the past. I actually forgot about the fact that you can call on ANY date. However I assume that coupon dates are the most commonly dates that are chosen for calling any structure. Thanks again, Toy out... >From: Guowen Han <GH...@dt...> >To: "Toyin Akin" <toy...@ho...> >CC: >qua...@li...,qua...@li..., >lui...@gm...,qua...@li... >Subject: Re: [Quantlib-users] Pricing Callable Capped Floaters within >a HullWhite Tree >Date: Wed, 19 Jul 2006 09:07:08 -0400 > >Please keep in mind >1. the call schedule does not have to match the coupon schedule, >2. the quoted call price is kind of clean, and >3. the simulated prices are always dirty price and the backward induction >values on the tree are kind of dirty price (including accrued interest) > >So, the call prices are not necessary the paid off price when the calls >are exercised. > >Guowen > > > > > > >"Toyin Akin" <toy...@ho...> >Sent by: qua...@li... >07/19/2006 03:40 AM > >To >lui...@gm... >cc >qua...@li..., qua...@li... >Subject >[Quantlib-users] Pricing Callable Capped Floaters within a HullWhite >Tree > > > > > > > >Hi all, > >I am looking at the possibility of pricing callable capped floater using >QuantLib and it seems like most of the code to price such a product is >more >or less within Quantlib already (parts of the logic is present in >different >classes). > >Basically I want to price, for each period, the following > >Libor() - Caplet(Libor, X)*Notional*AccuralPeriod , callable @ $Y for each > >period. > >This has to be priced via a tree methodology and the Libor() - Cap(Libor, >X)*Notional*AccuralPeriod >part can be priced by > >1) implementing the Libor() pricing via the float leg code that is part of > >the DiscretizedSwap class >2) implementing the Caplet(Libor, X) pricing via the cap leg code that is >part of the DiscretizedCapFloor class > >Thus these two legs can be pulled out to form a class like the >DiscretizedSwaption class. > >The issue I have is how to price the callable part. > >Now I have this little description of the callable algorithm from the >FinancialCAD web site : > >########################################################### >The price of a callable capped floater is obtained by building a trinomial > >interest rate tree, constructing the yield curve on each node of the tree, > >and re-valuing the capped floater (note) on each node. On nodes that are >exercise dates, the price of the note is compared to the call and/or put >price(s). If it is possible for the issuer to call, and the call price is > >less than the note price, then the call option is exercised and the price >of >the option on that node is the difference between the call price and the >note price. If the note is not called and it is possible for the holder >to >put, and the put price is greater than the note price, then the put option > >is exercised and the price of the option on that node is the difference >between the put price and the note price. The option price is rolled back > >to earlier nodes on the tree and re-calculated as above depending on >whether >or not the option is exercised. The option price rolled back to the value > >date is added to the price of the non-callable capped floater on the value > >date to get the price of the callable capped floater. >########################################################### > >My question is regarding the statement " difference between the call price > >and the note price". > >Again the note can be computed easily via the "Libor() - Caplet(Libor, >X)*Notional*AccuralPeriod" expression. The note is priced backwards in >time >and each time you step back, an extra coupon period is added onto the note > >(at each node). > >The tree that quantlib builds for interest rate pricing (ie - capfloor via > >tree) assumes that you are standing on the start date of a coupon period >(see preAdjustValuesImpl() of the DiscretizedCapFloor() class). Thus you >cannot use the regular max(L-X,0) expression to value a cap, but a >modified >version to take into account that you are standing on the start date of a >rate fixing and not the end. > >Thus, FINALLY!!, the question I am asking : Is there an adjustment that >one >needs to perform on this "difference between the call price and the note >price" because we are standing on the start date of each coupon period. > >I am making the assumption that the $Y callable price is to be paid at the > >each of each callable period. Is this the normal convention? > >Long winded I know...!! >Toy out. > > > >------------------------------------------------------------------------- >Take Surveys. Earn Cash. 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The company >accepts no liability for any damage caused by any virus transmitted >by this email. >------------------------------------------------------------------------- >Take Surveys. Earn Cash. Influence the Future of IT >Join SourceForge.net's Techsay panel and you'll get the chance to share >your >opinions on IT & business topics through brief surveys -- and earn cash >http://www.techsay.com/default.php?page=join.php&p=sourceforge&CID=DEVDEV >_______________________________________________ >QuantLib-users mailing list >Qua...@li... >https://lists.sourceforge.net/lists/listinfo/quantlib-users |
