11_18_2010 Cap, Floor und Swaption

11_18_2010 Cap, Floor und Swaption - FIXED INCOME...

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1 NAME OF INITIATIVE OR GROUP FIXED INCOME SECURITIES Fall 2010 – FNCE 235/725 Prof. Stephan Dieckmann NOVEMBER 18, 2010 CAP, FLOOR and SWAPTION
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2 Cap & Floor • So far we introduced interest rate options, in particular cap and floor, and represented them in the Vasicek model • Cap = Summation of Caplets, where each caplet is a call option on an interest rate • Floor = Summation of Floorlets, where each floorlet is a put option on an interest rate • A popular way to represent the prices for such securities is based on the Black (1976) model • Goes back to Black and Scholes model for equity derivatives, but specialized to interest rates • Black (1976) models options on Forward Rates
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3 Black (1976) • Model is based on the assumption that forward rates are log- normally distributed , %-changes in forward rates are normally distributed N(.) is the cumulative density of a normal distribution (mean zero, variance one), NORMSDIST in EXCEL M is the nominal amount of the cap or floor in USD, and
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11_18_2010 Cap, Floor und Swaption - FIXED INCOME...

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