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floorbybk

Price floor instrument from Black-Karasinski interest-rate tree

Syntax

[Price, PriceTree] = floorbybk(BKTree, Strike, Settle, Maturity,
Reset, Basis, Principal, Options)

Arguments

BKTree

Interest-rate tree structure created by bktree.

Strike

Number of instruments (NINST)-by-1 vector of rates at which the floor is exercised.

Settle

Settlement date. NINST-by-1 vector of dates representing the settlement dates of the floor. The Settle date for every floor is set to the ValuationDate of the BK tree. The floor argument Settle is ignored.

Maturity

NINST-by-1 vector of dates representing the maturity dates of the floor.

Reset

(Optional) NINST-by-1 vector representing the frequency of payments per year. Default = 1.

Basis

(Optional) Day-count basis of the instrument. A vector of integers.

  • 0 = actual/actual (default)

  • 1 = 30/360 (SIA)

  • 2 = actual/360

  • 3 = actual/365

  • 4 = 30/360 (BMA)

  • 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/actual (ISDA)

  • 13 = BUS/252

For more information, see basis.

Principal

(Optional) The notional principal amount. Default = 100.

Options

(Optional) Derivatives pricing options structure created with derivset.

Description

[Price, PriceTree] = floorbybk(BKTree, Strike, Settlement, Maturity, Reset, Basis, Principal, Options) computes the price of a floor instrument from a Black-Karasinski tree.

Price is an NINST-by-1 vector of the expected prices of the floor at time 0.

PriceTree is the tree structure with values of the floor at each node.

Examples

expand all

Price a 3% Floor Instrument Using a Black-Karasinski Interest-Rate Tree

Load the file deriv.mat, which provides BKTree. The BKTree structure contains the time and interest rate information needed to price the floor instrument.

load deriv.mat;

Set the required values. Other arguments will use defaults.

Strike = 0.03;
Settle = '01-Jan-2005';
Maturity = '01-Jan-2009';

Use floorbybk to compute the price of the floor instrument.

Price = floorbybk(BKTree, Strike, Settle, Maturity)
Warning: Floors are valued at Tree ValuationDate rather than Settle 
Warning: Not all cash flows are aligned with the tree. Result will be
approximated. 
Warning: Not all cash flows are aligned with the tree. Result will be
approximated. 

Price =

    0.2061

See Also

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