Amortizing Floor Option Model
An amortizing floor option consists of 12 floorlets, or put options, on the arithmetic average of the daily 12-month Pibor rate fixings over respective windows of approximately 30 calendar days.
Pricing Amortizing Floor Option
An amortizing floor option consists of 12 floorlets, or put options, on the arithmetic average of the daily 12-month Pibor rate fixings over respective windows of approximately 30 calendar days. Furthermore the notional amount corresponding to each floorlet is specified by an amortization schedule.
We consider a floor option consisting of a series of floorlets as follows. Here each floorlet is specified by
where
For each period in the tables above, a party is short a floorlet specified by
strike, 3.55%,
payment at settlement date of the form
where
where
We now approximates the price of a floorlet by
where
We compute, over a specified averaging window,
Consider a European style option of the form,
We calculate, by an analytical formula,
where
With respect to our deal, Tranche 1, we apply black_opt to calculate
We note that the black_opt addin list of formal parameters includes a string input, “C” or “P”, to respectively denote call or put option calculation. In the WM spreadsheet implementation, however, the option calculation parameter input is not of the required form above. It appears from numerical tests, however, that in this case the addin defaults to a put option calculation. To be consistent with the addin’s formal parameter types, we suggest modifying the spreadsheet’s corresponding input to
If ($M$5, “C”, “P”).
Figure 4.1. Pibor fixing points.
based on an Euler discretization scheme. Next we scale the numerical value for
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