Download presentation

Presentation is loading. Please wait.

Published byByron Lake Modified over 2 years ago

1
Interest Rate Derivative Pricing

2
IRD Valuation Caps, Floors and Collars Swaptions

3
Caps and Floors Application of B-S model as modified by Black (1976):

4
Caps and Floors Application of Put-Call Parity by Black (1976):

5
Caps & Floors Example Assume you are concerned with rising rates on a $100m, variable debt your company owes in 1 year. Currently the variable rate is 6.5%, and you would like to fix it for no charge. The current forward rate is 6.65%, the riskless rate is 4.35%, and the rate volatility is 15%. (Note: days = Actual/360)

6
Cap (Caplet) D 1 =.227N(D 1 )=.5898 D 2 =.077N(D 2 )=.5307 Black-76 =.004525 or 45 ¼ BPs Adjustment for $1 Notional Value = 0.93765 Cap =.004243 or a bit less than 42 ½ BPs On $100m NP = $424,284…expensive!

7
Floor (Floorlet) D 1 =.227N(-D 1 )=.4102 D 2 =.077N(-D 2 )=.4693 Black-76 =.003089 or 31 BPs Adjustment for $1 Notional Value = 0.93765 Floor =.002896 or a bit less than 29 BPs On $100m NP = $289,624

8
Collar Collar = Buy Cap and Sell Floor Collar = - Cap + Floor = - 424,284 + 289,624 = $134,660 Payment As F > X, Collar in-the-money. Fix rate at 6.5%, no higher, but none of the benefit if lower. If set strike rate at 6.65%, zero-cost collar.

9
Swaptions Also usage of Black (76) extension Payer (Call) swaption: The right (but not the obligation) to pay the fixed rate, and receive the floating rate in a swap of pre- specified term and rate. The right to be the swap buyer. Receiver (Put) swaption: The right (but not the obligation) to receive the fixed rate, and pay the floating rate in a swap of pre- specified term and rate. The right to be the swap seller.

10
Payer (Call) Swaption

11
Receiver (Put) Swaption

12
Swaption Example 2 year call (put) swaption on a 4 year swap (semi-annual resets) that has a pay fixed rate of 7%. The call strike is 7.5%, the riskless rate is 6% and rate volatility is 20%.

13
Swaption Example D 1 = -.1025N(D 1 )=.4592 D 2 = -.3854N(D 2 )=.3500 Black-76 Call =.0052 or 52 BPs Adjustment for $1 Notional Value = 3.4370 Call Swaption =.01796 or a bit less than 180 BPs

14
Swaption Example D 1 = -.1025N(D 1 )=.4592 D 2 = -.3854N(D 2 )=.3500 Black-76 Put =.0097 or 97 BPs Adjustment for $1 Notional Value = 3.4370 Put Swaption =.03221 or a bit more than 322 BPs Note: Put more expensive as F < X, so put (not call) in-the-money.

Similar presentations

OK

Financial Risk Management Pricing Interest Rate Products Jan Annaert Ghent University Hull, Chapter 22.

Financial Risk Management Pricing Interest Rate Products Jan Annaert Ghent University Hull, Chapter 22.

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Ppt on object oriented programming with c++ pdf Ppt on chemistry magic tricks Ppt on ten figures of speech Ppt on edge detection in image processing Compress ppt on mac Free ppt on forest society and colonialism Ppt on tsunami warning system Download ppt on space exploration Ppt on seven segment display diagram Ppt on endangered species of plants and animals