swaptionbyhjm

Price swaption from Heath-Jarrow-Morton interest-rate tree

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Syntax

[Price,PriceTree] = swaptionbyhjm(HJMTree,OptSpec,Strike,ExerciseDates,Spread,Settle,Maturity)
[Price,PriceTree] = swaptionbyhjm(___,Name,Value)

Description

[Price,PriceTree] = swaptionbyhjm(HJMTree,OptSpec,Strike,ExerciseDates,Spread,Settle,Maturity) prices swaption using a Heath-Jarrow-Morton tree.

example

[Price,PriceTree] = swaptionbyhjm(___,Name,Value) adds optional name-value pair arguments.

example

Examples

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Open Live Script

This example shows how to price a 1-year call swaption using an HJM interest-rate tree. Assume that interest rate is fixed at 5% annually between the valuation date of the tree until its maturity. Build a tree with the following data.

Rates = [ 0.05;0.05;0.05;0.05];  
StartDates = datetime(2007,1,1);  
EndDates =[datetime(2008,1,1) ; datetime(2009,1,1) ; datetime(2010,1,1) ; datetime(2011,1,1)];
ValuationDate = StartDates;  
Compounding = 1;    

% define the RateSpec
RateSpec = intenvset('Rates', Rates, 'StartDates', StartDates, 'EndDates',...
EndDates, 'Compounding', Compounding);   

% use VolSpec to compute the interest-rate volatility
VolSpec=hjmvolspec('Constant',0.01);

% use TimeSpec to specify the structure of the time layout for the HJM interest-rate tree
TimeSpec = hjmtimespec(ValuationDate, EndDates, Compounding);

% build the HJM tree
HJMTree = hjmtree(VolSpec, RateSpec, TimeSpec); 

% use the following swaption arguments
ExerciseDates = datetime(2008,1,1);
SwapSettlement = ExerciseDates;
SwapMaturity   = datetime(2010,1,1);
Spread = [0];  
SwapReset = 1;   
Basis  = 1;  
Principal = 100;  
OptSpec = 'call';    
Strike=0.05;   

% price the swaption

[Price, PriceTree] = swaptionbyhjm(HJMTree, OptSpec, Strike, ExerciseDates, ...
Spread, SwapSettlement, SwapMaturity,'SwapReset', SwapReset, ...
'Basis', Basis, 'Principal', Principal)
Price = 
0.9296

PriceTree = struct with fields:
    FinObj: 'HJMPriceTree'
      tObs: [5×1 double]
     PBush: {[0.9296]  [1×1×2 double]  [1×2×2 double]  [1×4×2 double]  [0 0 0 0 0 0 0 0]}
Open Live Script

This example shows how to price a 1-year call swaption with receiving and paying legs using an HJM interest-rate tree. Assume that interest rate is fixed at 5% annually between the valuation date of the tree until its maturity. Build a tree with the following data.

Rates = [ 0.05;0.05;0.05;0.05];  
StartDates = datetime(2007,1,1);  
EndDates =[datetime(2008,1,1) ; datetime(2009,1,1) ; datetime(2010,1,1) ; datetime(2011,1,1)];
ValuationDate = StartDates;  
Compounding = 1;

Define the RateSpec.

RateSpec = intenvset('Rates',Rates,'StartDates',StartDates,'EndDates',...
EndDates,'Compounding',Compounding);

Use VolSpec to compute the interest-rate volatility.

VolSpec=hjmvolspec('Constant',0.01);

Use TimeSpec to specify the structure of the time layout for the HJM interest-rate tree.

TimeSpec = hjmtimespec(ValuationDate,EndDates,Compounding);

Build the HJM tree.

HJMTree = hjmtree(VolSpec,RateSpec,TimeSpec);

Use the following swaption arguments

ExerciseDates = datetime(2008,1,1);
SwapSettlement = ExerciseDates;
SwapMaturity   = datetime(2010,1,1);
Spread = [0];  
SwapReset = [1 1];  % 1st column represents receiving leg, 2nd column represents paying leg  
Basis  = [1 3];     % 1st column represents receiving leg, 2nd column represents paying leg 
Principal = 100;  
OptSpec = 'call';    
Strike=0.05;

Price the swaption.

[Price, PriceTree] = swaptionbyhjm(HJMTree,OptSpec,Strike,ExerciseDates, ...
Spread,SwapSettlement,SwapMaturity,'SwapReset',SwapReset, ...
'Basis',Basis,'Principal',Principal)
Price = 
0.9296

PriceTree = struct with fields:
    FinObj: 'HJMPriceTree'
      tObs: [5×1 double]
     PBush: {[0.9296]  [1×1×2 double]  [1×2×2 double]  [1×4×2 double]  [0 0 0 0 0 0 0 0]}

Input Arguments

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Interest-rate tree structure, specified by using hjmtree.

Data Types: struct

Definition of the option as 'call' or 'put', specified as a NINST-by-1 cell array of character vectors. For more information, see More About.

Data Types: char | cell

Strike swap rate values, specified as a NINST-by-1 vector.

Data Types: double

Exercise dates for the swaption, specified as a NINST-by-1 vector or a NINST-by-2 vector using a datetime array, string array, or date character vectors, depending on the option type.

  • For a European option, ExerciseDates are a NINST-by-1 vector of exercise dates. Each row is the schedule for one option. When using a European option, there is only one ExerciseDate on the option expiry date.

  • For an American option, ExerciseDates are a NINST-by-2 vector of exercise date boundaries. For each instrument, the option can be exercised on any coupon date between or including the pair of dates on that row. If only one non-NaN date is listed, or if ExerciseDates is NINST-by-1, the option can be exercised between the ValuationDate of the tree and the single listed ExerciseDate.

To support existing code, swaptionbyhjm also accepts serial date numbers as inputs, but they are not recommended.

Number of basis points over the reference rate, specified as a NINST-by-1 vector.

Data Types: double

Settlement date (representing the settle date for each swap), specified as a NINST-by-1 vector using a datetime array, string array, or date character vectors. The Settle date for every swaption is set to the ValuationDate of the HJM tree. The swap argument Settle is ignored. The underlying swap starts at the maturity of the swaption.

To support existing code, swaptionbyhjm also accepts serial date numbers as inputs, but they are not recommended.

Maturity date for each swap, specified as a NINST-by-1 vector using a datetime array, string array, or date character vectors.

To support existing code, swaptionbyhjm also accepts serial date numbers as inputs, but they are not recommended.

Name-Value Arguments

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Specify optional pairs of arguments as Name1=Value1,...,NameN=ValueN, where Name is the argument name and Value is the corresponding value. Name-value arguments must appear after other arguments, but the order of the pairs does not matter.

Before R2021a, use commas to separate each name and value, and enclose Name in quotes.

Example: [Price,PriceTree] = swaptionbyhjm(HJMTree,OptSpec, ExerciseDates,Spread,Settle,Maturity,'SwapReset',4,'Basis',5,'Principal',10000)

(Optional) Option type, specified as the comma-separated pair consisting of 'AmericanOpt' and NINST-by-1 positive integer flags with values:

  • 0 — European

  • 1 — American

Data Types: double

Reset frequency per year for the underlying swap, specified as the comma-separated pair consisting of 'SwapReset' and a NINST-by-1 vector or NINST-by-2 matrix representing the reset frequency per year for each leg. If SwapReset is NINST-by-2, the first column represents the receiving leg, while the second column represents the paying leg.

Data Types: double

Day-count basis representing the basis used when annualizing the input forward rate tree for each instrument, specified as the comma-separated pair consisting of 'Basis' and a NINST-by-1 vector or NINST-by-2 matrix representing the basis for each leg. If Basis is NINST-by-2, the first column represents the receiving leg, while the second column represents the paying leg.

  • 0 = actual/actual

  • 1 = 30/360 (SIA)

  • 2 = actual/360

  • 3 = actual/365

  • 4 = 30/360 (PSA)

  • 5 = 30/360 (ISDA)

  • 6 = 30/360 (European)

  • 7 = actual/365 (Japanese)

  • 8 = actual/actual (ICMA)

  • 9 = actual/360 (ICMA)

  • 10 = actual/365 (ICMA)

  • 11 = 30/360E (ICMA)

  • 12 = actual/365 (ISDA)

  • 13 = BUS/252

For more information, see Basis.

Data Types: double

Notional principal amount, specified as the comma-separated pair consisting of 'Principal' and a NINST-by-1 vector.

Data Types: double

Derivatives pricing options structure, specified as the comma-separated pair consisting of 'Options' and a structure obtained from using derivset.

Data Types: struct

Output Arguments

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Expected prices of the swaptions at time 0, returned as a NINST-by-1 vector.

Tree structure of instrument prices, returned as a MATLAB® structure of trees containing vectors of swaption instrument prices and a vector of observation times for each node. Within PriceTree:

  • PriceTree.PTree contains the clean prices.

  • PriceTree.tObs contains the observation times.

More About

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Version History

Introduced before R2006a

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See Also

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