Price cap using Linear Gaussian two-factor model
adds optional name-value pair arguments. CapPrice
= capbylg2f(___,Name,Value
)
Note
Use the optional name-value pair argument, Notional
, to pass a
schedule to compute the price for an amortizing cap.
The following defines the two-factor additive Gaussian interest rate model, given the
ZeroCurve
, a
, b
,
sigma
, eta
, and rho
parameters:
where is a two-dimensional Brownian motion with correlation ρ and ϕ is a function chosen to match the initial zero curve.
[1] Brigo, D. and F. Mercurio. Interest Rate Models - Theory and Practice. Springer Finance, 2006.