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oIRcap1_Price( ) Example

Specification

Consider a 5-year interest rate cap that has an effective date of 10 March 2003, a maturity date of 10 March 2008, and a notional value of $100,000. The cap, which has an annual reset frequency, has a strike rate of 8.25% and a volatility of 30%, while the Business Day and Accrual Basis conventions are 'following day' and 'actual/360' respectively. The rate reset cycle is computed backwards from the maturity date and rates are interpolated from the zero rates.

What is the fair value for the cap assuming a valuation date of 12 August 2003?

 

 

Function Specification

=oIRCap1_Price(1, "12/8/2003", "10/3/2003", "10/3/2008", 100000, 0.0825, 1, 3, 3, 2, 0.3, 1, D1:F24, H1:J24, L1:L75, 0)

 

 

Parameter Name

Parameter Value

 

 

 

 

 

Option Type

1

 

 

Value Date

12/8/2003

 

 

Effective Date

10/3/2003

 

 

Maturity Date

10/3/2008

 

 

Notional

100,000

 

 

Strike Rate

0.0825

 

 

Reset Frequency

1

 

 

Accrual Basis

3

 

 

Business Day Convention

3

 

 

Interpolation Method

2

 

 

Volatility

0.3000

 

 

Date Generation

1

 

 

Reset Curve

D1:F24

See Zero Curve

 

Discounting Curve

H1:J24

See Zero Curve

 

Holiday Schedule

L1:L75

See Holiday Schedule

 

Output Flag

0

 

 

 

Solution

The following results are obtained:

Option Value

$1,242.4310

Delta

0.8360

Gamma

39.3726

Theta

-0.0054

Vega

0.0868

 

 

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