Financial Instruments Toolbox provides customizable objects for fitting a yield curve to market data. The toolbox helps you analyze market data by deriving curve objects, including forward rate curve, discount rate curve, and par yield curve.
The interest rate curve objects help you fit yield curves to market data using several approaches:
Interest rate curve objects also help you analyze yield curves to derive discount rates, zero rates, forward rates, and par yields.
Additionally, you can convert interest rate curve objects to model interest rate term structures and price fixed-income derivatives. For example, with dual curve construction functionality, you can price swaps, floors, caps, and swaptions with LIBOR-OIS curves.
Financial Instruments Toolbox provides several approaches for option pricing.
Models for closed-form option pricing include:
Models for binomial and trinomial trees include pricing and sensitivity calculations for interest rate derivatives and equity derivatives.
Option pricing with Monte Carlo simulation helps you calculate price and sensitivity for path-dependent or basket options that are difficult or not practical to price using trees. Financial Instruments Toolbox supports the Longstaff-Schwartz model for calculating price and sensitivity of basket equity options. Optionally, you can use the stochastic differential equation (SDE) solvers in Econometrics Toolbox™ to build custom Monte Carlo simulations for option pricing.
Financial Instruments Toolbox enables you to price portfolios and apply hedging strategies. You can:
Financial Instruments Toolbox includes functions for finding prices and sensitivities of several fixed-income instruments based on interest rate curves. You can price interest rate instruments using closed-form solutions, interest rate term structure, or trees. You can apply the functions to a portfolio of different types of instruments or to groups of instruments of the same type.
The toolbox provides tools to calculate price, par fixed-rate, and duration of interest rate swaps. The duration-hedging capabilities let you hedge a portfolio and address interest rate risk with a swap arrangement. Supported swaps include vanilla, forward, and amortizing. Dual curve construction tools enable you to price swaps, caps, floors, and swaptions using LIBOR-OIS curves or other combinations.
You can also calculate prices using Black's model for forwards, futures, options on futures, swaptions, European call/put options, interest rate cap/caplets, and interest rate floor or floorlets. You can calibrate the SABR stochastic volatility model from market-implied Black volatilities.
Additional fixed-income instruments include:
Financial Instruments Toolbox provides functions for modeling the evolution of stock prices using these models:
With these discrete-time models, you can create binomial or trinomial trees and illustrate the expected stock price for each node in the tree with the corresponding volatility.
The toolbox also provides functions for calculating portfolio prices and sensitivities based on binomial and trinomial equity price trees.
Financial Instruments Toolbox supports the following equity options:
Financial Instruments Toolbox includes functions to price credit derivatives such as new and existing credit default swap (CDS) agreements and credit default swaptions. You can value running spread CDS contracts that do not have upfront payments and standard spread contracts that require an upfront payment.
The toolbox simplifies common CDS valuation tasks so that you can:
Financial Instruments Toolbox includes functions to compute credit exposures from mark-to-market OTC contract values and compute exposure profiles from credit exposures, along with an example that demonstrates how to compute the unilateral credit value adjustment (CVA) for a bank portfolio of vanilla swaps with several counterparties.
Financial Instruments Toolbox lets you model generic fixed-rate mortgage pools and balloon mortgages. The toolbox provides tools to calculate price and yield of mortgage-backed securities (MBS) using prepayment options derived from uniform practices of the Public Securities Association (PSA). You can calculate the mortgage-pool price or effective duration using the option adjusted spread method for your mortgage pool. Additionally, you can measure the risk for a mortgage-pool portfolio using convexity, duration, and average life calculations.
The toolbox provides functions to calculate price, yield, and spreads for collateralized mortgage obligations (CMO) and tools for scheduling cash flows between tranches. Supported schemes for prepayment tranches are: