Component 
Resolution  IRO Pricing 




Function Definition 
oIRbondOption_HW(ValueDate, OptionType, ExerciseStyle, ExerciseSchedule, Volatility, MeanReversion, StepsPerCoupon, BondDated, BondMaturity, BondStubDates, Notional, Coupon, Frequency, AccrualBasis, BusDayConv, InterpMethod, ZeroCurve, Holidays, Output) Calculates the option value. Can also return various risk statistics and details for the underlying bond. 




IRO Types 
Interest Rate Bond Options. 




Function Parameters 



. 

Parameters 
Description 

Parameter Type 

Restrictions 

. 

ValueDate 

Valuation date of the bond option. 

Date 



OptionType 

Call or Put 

Enumerated Constant 

1  Call 

ExerciseType 

European, Bermudan or American. 

Enumerated Constant 

1  European 

ExerciseSchedule 

Lists exercise dates and the termination fee associated with each date. For European options, only the last date is used. For American options, every date between the first and last is assumed to be a valid exercise date. 

Curve




Volatility 

Annualised volatility of the underlying term structure, expressed as a decimal. 

Double or Curve 

Volatility >0% 

MeanReversion 

Requires an estimate of the mean reversion rate. 

Double 

> 0 

StepsPerCoupon 

Determines the number of steps used to construct the lattice. The total number of branches in the lattice is also related to the number of coupon periods outstanding between the valuation date and the maturity date of the underlying bond. 

Long


Steps per Coupon > 0


BondDated 

The original issue date of the bond. 

Date


SwapEffective < SwapMaturity


BondMaturity 

The maturity date of the bond. 

Date 

BondMaturity > BondDated 

BondStubDates 

Only needed if the bond has an odd first or last period. 

Array of Dates 





First Coupon Date: Date that the first coupon is paid (if bond does not have an odd first period, leave blank). 



F.C.D > BondDated 



Penultimate Coupon Date: Date that the penultimate coupon is paid (if bond does not have an odd last period, leave blank). 



P.C.D > Bond Dated 

Notional 

The face value of the bond. Assumed to be fixed for the life of the bond. This means that amortizing and accreting bonds are not supported. 

Double




Coupon 

Defines the coupon method to be used. Can be set to zero if required. 

Double 



Frequency 

The frequency of the coupon. 

Enumerated Constant


1  Annual 

AccrualBasis 

Basis for determining coupon amounts and accrued interest. 

Enumerated Constant 

1  Act/Act (actual) 

BusDayConv 

Business day convention. Used to determine the start and end date of each coupon payment period. 

Enumerated Constant 

1  No Adjustment 

InterpMethod 

Method used to calculate rates and discount factors from the supplied zero curve. 

Enumerated Constant 

1  Discount Factors 

ZeroCurve 

The zero curve that is used to project and discount cash flows. 

Curve 



Holidays 

Schedule of nonbusiness days (excluding weekends). 

Date Range 

Leave blank if not applicable 

Output 

Indicates which result (or set of results) will be displayed in the worksheet. When returning more than one value, the function must be entered as an array function. 

Enumerated Constant 

0  All ten outputs 









Function Outputs 



Output 

Description 

Option Value 

The fair value of the option. 

Delta 

Delta measures the risk associated with a shift in the zero curve. This can be approximated by revaluing the option based on a zero curve that has been shifted up by 1 basis point. 

Gamma 

Defined here as the second derivative of the option value with respect to a parallel shift in the zero curve. 

Theta 

Defined as the sensitivity of option value with respect to an increase in time (reduction in time to maturity). This is estimated by revaluing the option with the valuation date incremented by one day. 

Vega 

Defined as the sensitivity of option value with respect to volatility. This is estimated by revaluing the option using an incremented volatility input. 

Clean Price (Option Inclusive) 

The clean price is computed by adding (for puts) or subtracting (for calls) the computed option value from the straight bond clean price. This value should be equal to the computed values for equivalent callable or puttable bonds. 

Dirty Price (Option Inclusive) 

The dirty price is computed by adding (for puts) or subtracting (for calls) the computed option value from the straight bond dirty price. This value should be equal to the computed values for equivalent callable or puttable bonds. 

Clean Price (Option Exclusive) 

The clean price for the underlying straight bond is computed as the straight bond dirty price less accrued interest. 

Dirty Price (Option Exclusive) 

The dirty price of the straight bond is derived directly from the interest rate lattice that is constructed to value the option itself. This value should be consistent with the input zero curve. 

Accrued Interest 

Computed using the same method that is used to compute accrued interest for a straight bond. 
See Also oIRbondOption_BDT1( ) Function 
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