LIBOR Rate Model is used for pricing Libor-rate based derivative securities. The model is applied, primarily, to value instruments that settle at a Libor-rate reset point. In order to value instruments that settle at points intermediate to Libor resets, we calculate the numeraire value at the settlement time by interpolating the numeraire at…[Read more]

We priced the payer swaption using our benchmark Black’s model and then priced the same swaption, using our benchmark HW trinomial tree model, based on the corresponding HW volatility.

A daily digital swap that has two legs. One leg is a regular floating leg and the other leg is a Libor-based, daily digital leg. The daily digital leg is weighted by the ratio of the number of calendar days in the period that the reference rate sets below an upper level to the total number of calendar days in the period.

A quanto total return Libor Swap is a swap where one leg is a regular floating leg paying LIBOR less a constant spread and the other leg makes a single payment at the swap’s maturity equal to a leveraged non-negative return on USD-for-EURO exchange rate paid in CAD. The main focus of the valuation model is the quantoed total return on the FX rate.

Early start swaps are a series of 10-year interest rate swaps. Each swap has an American style option for the counterparty of starting the swap early, within a period of three month. Otherwise, the swaps are plain vanilla fixed-for-floating swaps.

A constant maturity swap (CMS) spread option makes payments based on a bounded spread between two index rates (e.g., a GBP CMS rate and a EURO CMS rate). We assume that both the forward GBP and EURO CMS rates follow geometric Brownian motion under their respective T-forward measures.

Variable rate swap is an interest rate swap that has two legs: one fixed rate leg and a variable rate leg. The variable leg involves fixed rate payments for an initial period of time and a floating rate for the rest. The floating rate on that portion is defined as a minimum of two index rates.

The Black-Karasinski model is a short rate model that assumes the short-term interest rates to be log-normally distributed. We implement the one factor Black-Karasinski model as a binomial or trinomial tree.

An arrear quanto constant-maturity-swap (CMS) is a swap that pays coupons in a different currency from the notional and in arrears. The underlying swap rate is computed from a forward starting CMS.

We propose a three-factor tree model that implements the Hull-White and Black-Karasinski models. The new tree model does preserve the martingale property of the stock for sufficiently long terms (with accuracy better that 10-8 for terms of at least 10 years).

A valuation model is presented for pricing an American style call option on the yield of Treasury bond. The payoff is positive if the yield exceeds a predetermined strike level. The model assumes the yield of an American Treasury bond to be a log-normally distributed stochastic process and uses Monte-Carlo simulation to price the deal as a…[Read more]

A flexible GIC represents a financial instrument paying an annual coupon and provides an option for the holder to redeem the principal and accrued interest during the thirty days following the first and second coupons.

A Callable Inverse Floating Rate Swap is a forward swap agreement with an option of canceling the swap each year starting from several years in future.