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Pricing And Calibration Of A Chooser Flexible Cap

Author

Listed:
  • DAISUKE ITO

    (SMBC Capital Markets, Inc., 277 Park Avenue, New York, NY 10172, USA)

  • MASAMITSU OHNISHI

    (Graduate School of Economics & Center for the Study of Finance and Insurance, Osaka University, 1–7 Machikaneyama–machi, Toyonaka, Osaka 560–0043, Japan)

  • YASUHIRO TAMBA

    (Credit Pricing Corporation, St. Luke's, Tower 28F, 8-1, Akashi-cho, Chuo-ku, Tokyo, 104-0044, Japan)

Abstract

In this paper, we deal with no-arbitrage pricing problems of a chooser flexible cap written on an underlying LIBOR. The chooser flexible cap allows a right for a buyer to exercise a limited and pre-determined number of the interim period caplets in a multiple-period cap 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, 2010. "Pricing And Calibration Of A Chooser Flexible Cap," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 27(02), pages 243-256.
    • Handle: RePEc:wsi:apjorx:v:27:y:2010:i:02:n:s0217595910002661
    DOI: 10.1142/S0217595910002661
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