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Pricing of a Chooser Flexible Cap and its Calibration

Author

Listed:
  • Daisuke Ito

    (Sumitomo Mitsui Bank)

  • Masamitsu Ohnishi

    (Graduate School of Economics, Osaka University; Daiwa Securities Chair, Graduate School of Economics, Kyoto University)

  • Yasuhiro TAMBA

    (Graduate School of Economics, Osaka University)

Abstract

In this paper, we deal with no-arbitrage pricing problems of a chooser flexible cap (floor) written on an underlying LIBOR. The chooser flexible cap (floor) allows a right for a buyer to exercise a limited and pre-determined number of the interim period caplets (floorlets) in a multiple-period cap (floor) agreement. Assuming a common diffusion short rate dynamics, e.g., Hull-White model, we propose a dynamic programming approach for their risk neutral evaluation. This framework is suited to a calibration from an observed initial yield curve and market price data of discount bonds, caplets, and floorlets.

Suggested Citation

  • Daisuke Ito & Masamitsu Ohnishi & Yasuhiro TAMBA, 2004. "Pricing of a Chooser Flexible Cap and its Calibration," Discussion Papers in Economics and Business 04-18, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:0418
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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0418.pdf
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    Cited by:

    1. Yasuhiro Tamba, 2005. "Pricing a Bermudan Swaption with a Short Rate Lattice Method," Discussion Papers in Economics and Business 05-03, Osaka University, Graduate School of Economics.

    More about this item

    Keywords

    chooser flexible cap; LIBOR; dynamic programming; Hull-White model; calibration.;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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