Pricing of a Chooser Flexible Cap and its Calibration

Daisuke Ito, Masamitsu Ohnishi () and Yasuhiro Tamba ()
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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

No 04-18, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

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.

Keywords: chooser flexible cap; LIBOR; dynamic programming; Hull-White model; calibration. (search for similar items in EconPapers)
JEL-codes: G13 G15 G21 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2004-10
New Economics Papers: this item is included in nep-fin and nep-mic
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Citations: View citations in EconPapers (1)

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