Price floor instrument from Black-Karasinski interest-rate tree
[Price, PriceTree] = floorbybk(BKTree, Strike, Settle, Maturity,
Reset, Basis, Principal, Options)
Interest-rate tree structure created by bktree.
Number of instruments (NINST)-by-1 vector of rates at which the floor is exercised.
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.
NINST-by-1 vector of dates representing the maturity dates of the floor.
(Optional) NINST-by-1 vector representing the frequency of payments per year. Default = 1.
(Optional) Day-count basis of the instrument. A vector of integers.
For more information, see basis.
(Optional) The notional principal amount. Default = 100.
(Optional) Derivatives pricing options structure created with derivset.
[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.
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.
Set the required values. Other arguments will use defaults.
Strike = 0.03; Settle = '01-Jan-2005'; Maturity = '01-Jan-2009';
Use floorbyhw to compute the price of the floor instrument.
Price = floorbybk(BKTree, Strike, Settle, Maturity)
Price = 0.2061