PRICING AND CALIBRATION OF A CHOOSER FLEXIBLE CAP

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

Asia-Pacific Journal of Operational Research (APJOR), 2010, vol. 27, issue 02, 243-256

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.

Keywords: Chooser flexible cap; LIBOR; dynamic programming; Hull–White model; calibration (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:apjorx:v:27:y:2010:i:02:n:s0217595910002661

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DOI: 10.1142/S0217595910002661

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