Pricing of a Chooser Flexible Cap and its Calibration
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.
|Date of creation:||Oct 2004|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econ.osaka-u.ac.jp/|
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