# 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

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:

\$1,242.4310

0.8360

39.3726

-0.0054

0.0868