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.
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Publisher Info
Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number
04-18.