floorbybdt
Price floor instrument from Black-Derman-Toy interest-rate tree
Syntax
Description
Examples
Price a 10% Floor Instrument Using a BDT Interest-Rate Tree
Load the file deriv.mat
, which provides BDTTree
. BDTTree
contains the time and interest-rate information needed to price the floor instrument.
load deriv.mat;
Set the required values. Other arguments will use defaults.
Strike = 0.10; Settle = '01-Jan-2000'; Maturity = '01-Jan-2004';
Use floorbybdt
to compute the price of the floor instrument.
Price = floorbybdt(BDTTree, Strike, Settle, Maturity)
Price = 0.2428
Price a 10% Floor Instrument Using a Newly Created BDT Interest-Rate Tree
First set the required arguments for the three needed specifications.
Compounding = 1; ValuationDate = '01-01-2000'; StartDate = ValuationDate; EndDates = ['01-01-2001'; '01-01-2002'; '01-01-2003'; '01-01-2004'; '01-01-2005']; Rates = [.1; .11; .12; .125; .13]; Volatility = [.2; .19; .18; .17; .16];
Create the specifications.
RateSpec = intenvset('Compounding', Compounding,... 'ValuationDate', ValuationDate,... 'StartDates', StartDate,... 'EndDates', EndDates,... 'Rates', Rates); BDTTimeSpec = bdttimespec(ValuationDate, EndDates, Compounding); BDTVolSpec = bdtvolspec(ValuationDate, EndDates, Volatility);
Create the BDT tree from the specifications.
BDTTree = bdttree(BDTVolSpec, RateSpec, BDTTimeSpec)
BDTTree = struct with fields:
FinObj: 'BDTFwdTree'
VolSpec: [1x1 struct]
TimeSpec: [1x1 struct]
RateSpec: [1x1 struct]
tObs: [0 1 2 3 4]
dObs: [730486 730852 731217 731582 731947]
TFwd: {[5x1 double] [4x1 double] [3x1 double] [2x1 double] [4]}
CFlowT: {[5x1 double] [4x1 double] [3x1 double] [2x1 double] [5]}
FwdTree: {1x5 cell}
Set the floor arguments. Remaining arguments will use defaults.
FloorStrike = 0.10;
Settlement = ValuationDate;
Maturity = '01-01-2002';
FloorReset = 1;
Use floorbybdt
to find the price of the floor instrument.
Price= floorbybdt(BDTTree, FloorStrike, Settlement, Maturity,... FloorReset)
Price = 0.0863
Compute the Price of an Amortizing Floor Using the BDT Model
Define the RateSpec
.
Rates = [0.03583; 0.042147; 0.047345; 0.052707; 0.054302]; ValuationDate = '15-Nov-2011'; StartDates = ValuationDate; EndDates = {'15-Nov-2012';'15-Nov-2013';'15-Nov-2014' ;'15-Nov-2015';'15-Nov-2016'}; Compounding = 1; RateSpec = intenvset('ValuationDate', ValuationDate,'StartDates', StartDates,... 'EndDates', EndDates,'Rates', Rates, 'Compounding', Compounding)
RateSpec = struct with fields:
FinObj: 'RateSpec'
Compounding: 1
Disc: [5x1 double]
Rates: [5x1 double]
EndTimes: [5x1 double]
StartTimes: [5x1 double]
EndDates: [5x1 double]
StartDates: 734822
ValuationDate: 734822
Basis: 0
EndMonthRule: 1
Define the floor instrument.
Settle ='15-Nov-2011'; Maturity = '15-Nov-2015'; Strike = 0.039; Reset = 1; Principal ={{'15-Nov-2012' 100;'15-Nov-2013' 70;'15-Nov-2014' 40;'15-Nov-2015' 10}};
Build the BDT Tree.
BDTTimeSpec = bdttimespec(ValuationDate, EndDates); Volatility = 0.10; BDTVolSpec = bdtvolspec(ValuationDate, EndDates, Volatility*ones(1,length(EndDates))'); BDTTree = bdttree(BDTVolSpec, RateSpec, BDTTimeSpec)
BDTTree = struct with fields:
FinObj: 'BDTFwdTree'
VolSpec: [1x1 struct]
TimeSpec: [1x1 struct]
RateSpec: [1x1 struct]
tObs: [0 1 2 3 4]
dObs: [734822 735188 735553 735918 736283]
TFwd: {[5x1 double] [4x1 double] [3x1 double] [2x1 double] [4]}
CFlowT: {[5x1 double] [4x1 double] [3x1 double] [2x1 double] [5]}
FwdTree: {1x5 cell}
Price the amortizing floor.
Basis = 0; Price = floorbybdt(BDTTree, Strike, Settle, Maturity, Reset, Basis, Principal)
Price = 0.3060
Input Arguments
BDTTree
— Interest-rate tree structure
structure
Interest-rate tree structure, specified by using bdttree
.
Data Types: struct
Strike
— Rate at which floor is exercised
decimal
Rate at which the floor is exercised, specified as a NINST
-by-1
vector
of decimal values.
Data Types: double
Settle
— Settlement date for floor
serial date number | date character vector | cell array of date character vectors
Settlement date for the floor, specified as a NINST
-by-1
vector
of serial date numbers or date character vectors. The Settle
date
for every floor is set to the ValuationDate
of
the BDT tree. The floor argument Settle
is ignored.
Data Types: double
| char
| cell
Maturity
— Maturity date for floor
serial date number | date character vector | cell array of date character vectors
Maturity date for the floor, specified as a NINST
-by-1
vector
of serial date numbers or date character vectors.
Data Types: double
| char
| cell
FloorReset
— Reset frequency payment per year
1
(default) | numeric
(Optional) Reset frequency payment per year, specified as a
NINST
-by-1
vector.
Data Types: double
Basis
— Day-count basis of instrument
0
(actual/actual) (default) | integer from 0
to 13
(Optional) Day-count basis representing the basis used when annualizing the input
forward rate, specified as a NINST
-by-1
vector
of integers.
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
— Notional principal amount
100
(default) | numeric
(Optional) Notional principal amount, specified as a
NINST
-by-1
of notional principal amounts, or a
NINST
-by-1
cell array, where 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.
Use Principal
to pass a schedule to compute the price for an
amortizing floor.
Data Types: double
| cell
Options
— Derivatives pricing options structure
structure
(Optional) Derivatives pricing options structure, specified using derivset
.
Data Types: struct
Output Arguments
Price
— Expected price of floor at time 0
vector
Expected price of the floor at time 0, returned as a NINST
-by-1
vector.
PriceTree
— Tree structure with values of floor at each node
vector
Tree structure with values of the floor at each node, returned as a MATLAB® structure of trees containing vectors of instrument prices and a vector of observation times for each node:
PriceTree.PTree
contains floor prices.PriceTree.tObs
contains the observation times.
More About
Floor
A floor is a contract that includes a guarantee setting the minimum interest rate to be received by the holder, based on an otherwise floating interest rate.
The payoff for a floor is:
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