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floorbynormal

Price floors using Normal or Bachelier pricing model

Syntax

[FloorPrice,Floorlets] = floorbynormal(RateSpec,Strike,Settle,Maturity,Volatility)
[FloorPrice,Floorlets] = floorbynormal(___,Name,Value)

Description

example

[FloorPrice,Floorlets] = floorbynormal(RateSpec,Strike,Settle,Maturity,Volatility) prices floors using the Normal (Bachelier) pricing model for negative rates. floorbynormal computes prices of vanilla floors and amortizing floors.

example

[FloorPrice,Floorlets] = floorbynormal(___,Name,Value) adds optional name-value pair arguments.

Examples

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Consider an investor who gets into a contract that floors the interest rate on a \$100,000 loan at –.6% quarterly compounded for 3 months, starting on January 1, 2009. Assuming that on January 1, 2008 the zero rate is .69394% continuously compounded and the volatility is 20%, use this data to compute the floor price. First, calculate the RateSpec, and then use floorbynormal to compute the FloorPrice.

ValuationDate = 'Jan-01-2008';
EndDates ='April-01-2010';
Rates = 0.0069394;
Compounding = -1;
Basis = 1;

% calculate the RateSpec
RateSpec = intenvset('ValuationDate', ValuationDate, ...
'StartDates', ValuationDate,'EndDates', EndDates, ...
'Rates', Rates,'Compounding', Compounding,'Basis', Basis);

Settle = 'Jan-01-2009'; % floor starts in a year
Maturity = 'April-01-2009';
Volatility = 0.20;
FloorRate = -0.006;
FloorReset = 4;
Principal=100000;

FloorPrice = floorbynormal(RateSpec, FloorRate, Settle, Maturity, Volatility,...
'Reset',FloorReset,'ValuationDate',ValuationDate,'Principal', Principal,...
'Basis', Basis)
FloorPrice = 3.7966e+03

Define the RateSpec.

Settle = datenum('20-Jan-2016');
ZeroTimes = [.5 1 2 3 4 5 7 10 20 30]';
ZeroRates = [0.0052 0.0055 0.0061 0.0073 0.0094 0.0119 0.0168 0.0222 0.0293 0.0307]';
ZeroDates = datemnth(Settle,12*ZeroTimes);
RateSpec = intenvset('StartDate',Settle,'EndDates',ZeroDates,'Rates',ZeroRates)
RateSpec =

struct with fields:

FinObj: 'RateSpec'
Compounding: 2
Disc: [10x1 double]
Rates: [10x1 double]
EndTimes: [10x1 double]
StartTimes: [10x1 double]
EndDates: [10x1 double]
StartDates: 736349
ValuationDate: 736349
Basis: 0
EndMonthRule: 1

Define the floor instrument and price with floorbyblk.

ExerciseDate = datenum('20-Jan-2026');

[~,ParSwapRate] = swapbyzero(RateSpec,[NaN 0],Settle,ExerciseDate)

Strike = .01;
BlackVol = .3;
NormalVol = BlackVol*ParSwapRate;

Price = floorbyblk(RateSpec,Strike,Settle,ExerciseDate,BlackVol)
ParSwapRate =

0.0216

Price =

1.2297

Price the floor instrument using floorbynormal.

Price_Normal = floorbynormal(RateSpec,Strike,Settle,ExerciseDate,NormalVol)
Price_Normal =

1.9099

Price the floor instrument using floorbynormal for a negative strike.

Price_Normal = floorbynormal(RateSpec,-.005,Settle,ExerciseDate,NormalVol)
Price_Normal =

0.0857

Input Arguments

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Interest-rate term structure (annualized and continuously compounded), specified by the RateSpec obtained from intenvset. For information on the interest-rate specification, see intenvset.

Data Types: struct

Rate at which floor is exercised, specified as a NINST-by-1 vector of decimal values.

Data Types: double

Settlement date for the floor, specified as a NINST-by-1 vector of serial date numbers, date character vectors, datetime objects, or string objects.

Data Types: double | char | datetime | string

Maturity date for the floor, specified as a NINST-by-1 vector of serial date numbers, date character vectors, datetime objects, or string objects.

Data Types: double | char | datetime | string

Normal volatilities values, specified as a NINST-by-1 vector of numeric values.

For more information on the Normal model, see Work with Negative Interest Rates.

Data Types: double

Name-Value Pair Arguments

Specify optional comma-separated pairs of Name,Value arguments. Name is the argument name and Value is the corresponding value. Name must appear inside single quotes (' '). You can specify several name and value pair arguments in any order as Name1,Value1,...,NameN,ValueN.

Example: [FloorPrice,Floorlets] = floorbynormal(RateSpec,Strike,Settle,Maturity,Volatility,'Reset',CapReset,'Principal',100000,'Basis',7)

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Reset frequency payment per year, specified as the comma-separated pair consisting of 'Reset' and a NINST-by-1 vector.

Data Types: double

Notional principal amount, specified as the comma-separated pair consisting of 'Principal' and a NINST-by-1 vector or a NINST-by-1 cell array. Each element in the NINST-by-1 cell array is a NumDates-by-2 cell array, where the first column is dates, and the second column is the associated principal amount. The date indicates the last day that the principal value is valid.

Use Principal to pass a schedule to compute the price for an amortizing cap.

Data Types: double | cell

Day-count basis of instrument representing the basis used when annualizing the input forward rate, specified as the comma-separated pair consisting of 'Basis' and a NINST-by-1 vector of integers. Values are:

• 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

Data Types: double

Observation date of the investment horizon, specified as the comma-separated pair consisting of 'ValuationDate' and a serial date number, date character vector, datetime object, or string object.

Data Types: double | char | datetime | string

The rate curve to be used in projecting the future cash flows, specified as the comma-separated pair consisting of 'ProjectionCurve' and a rate curve structure. This structure must be created using intenvset. Use this optional input if the forward curve is different from the discount curve.

Data Types: struct

Output Arguments

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Expected price of the floor, returned as a NINST-by-1 vector.

Floorlets, returned as a NINST-by-NCF array of caplets, padded with NaNs.