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floatbyhjm

Price floating-rate note from Heath-Jarrow-Morton interest-rate tree

Syntax

Settle, Maturity)
Settle, Maturity, Reset, Basis, Principal, Options,
EndMonthRule)
[Price, PriceTree] = floatbybk(HJMTree, Spread, Settle,
Maturity,Name,Value)

Input Arguments

HJMTree

Forward-rate tree structure created by hjmtree.

Number of instruments (NINST)-by-1 vector of number of basis points over the reference rate.

Settle

Settlement dates. NINST-by-1 vector of dates representing the settlement dates of the floating-rate note.

 Note:   The Settle date for every floating-rate note is set to the ValuationDate of the HJM tree. The floating-rate note argument Settle is ignored.

Maturity

NINST-by-1 vector of dates representing the maturity dates of the floating-rate note.

Ordered Input or Name-Value Pair Arguments

Enter the following optional inputs using an ordered syntax or as name-value pair arguments. You cannot mix ordered syntax with name-value pair arguments.

 Reset NINST-by-1 vector representing the frequency of payments per year. Default: 1 Basis Day-count basis of the instrument. A vector of integers. 0 = actual/actual 1 = 30/360 (SIA)2 = actual/3603 = actual/3654 = 30/360 (PSA)5 = 30/360 (ISDA)6 = 30/360 (European)7 = actual/365 (Japanese)8 = actual/actual (ISMA)9 = actual/360 (ISMA)10 = actual/365 (ISMA)11 = 30/360E (ISMA) 12 = actual/365 (ISDA)13 = BUS/252For more information, see basis. Default: 0 (actual/actual) Principal NINST-by-1 vector of notional principal amounts or NINST-by-1 cell array. For the latter case, each element of the cell array is a NumDates-by-2 matrix where the first column is dates and the second column is associated principal amount. The date indicates the last day that the principal value is valid. Default: 100 Options Derivatives pricing options structure created with derivset. EndMonthRule End-of-month rule. NINST-by-1 vector. This rule applies only when Maturity is an end-of-month date for a month having 30 or fewer days.0 = Ignore rule, meaning that a bond coupon payment date is always the same numerical day of the month.1 = Set rule on, meaning that a bond coupon payment date is always the last actual day of the month. Default: 1

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.

 AdjustCashFlowsBasis Adjust the cash flows based on the actual period day count. NINST-by-1 of logicals. Default: false BusinessDayConvention Require payment dates to be business dates. NINST-by-1 cell array with possible choices of business day convention:actual followmodifiedfollowpreviousmodifiedprevious Default: actual Holidays Holidays used for business day convention. NHOLIDAYS-by-1 of MATLAB® date numbers. Default: If no dates are specified, holidays.m is used. CapRate NINST-by-1 decimal annual rate or NINST-by-1 cell array, where each element is a NumDates-by-2 cell array, and the cell array first column is dates, and the second column is associated cap rates. The date indicates the last day that the cap rate is valid. FloorRate NINST-by-1 decimal annual rate or NINST-by-1 cell array, where each element is a NumDates-by-2 cell array, and the cell array first column is dates, and the second column is associated floor rates. The date indicates the last day that the floor rate is valid.

Description

Settle, Maturity)
computes the price of a floating-rate note from an HJM tree.

Settle, Maturity, Reset, Basis, Principal, Options,
EndMonthRule)
computes the price of a floating-rate note with optional inputs from an HJM tree.

[Price, PriceTree] = floatbybk(HJMTree, Spread, Settle,
Maturity,Name,Value)
computes the price of a floating-rate note from an HJM tree with additional options specified by one or more Name,Value pair arguments.

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

PriceTree is a structure of trees containing vectors of instrument prices and accrued interest, and a vector of observation times for each node.

PriceTree.PBush contains the clean prices.

PriceTree.AIBush contains the accrued interest.

PriceTree.tObs contains the observation times.

The Settle date for every floating-rate note is set to the ValuationDate of the HJM tree. The floating-rate note argument Settle is ignored.

Examples

expand all

Price a Floating-Rate Note Using an HJM Tree

Price a 20-basis point floating-rate note using an HJM forward-rate tree.

Load the file deriv.mat, which provides HJMTree. The HJMTree structure contains the time and interest-rate information needed to price the note.

```load deriv.mat;
```

Define the floating-rate note using the required arguments. Other arguments use defaults.

```Spread = 20;
Settle = '01-Jan-2000';
Maturity = '01-Jan-2003';
```

Use floatbyhjm to compute the price of the note.

```Price = floatbyhjm(HJMTree, Spread, Settle, Maturity)
```
```Price =

100.5529

```

Price an Amortizing Floating-Rate Note

Price an amortizing floating-rate note using the Principal input argument to define the amortization schedule.

Create the RateSpec.

```Rates = [0.03583; 0.042147; 0.047345; 0.052707; 0.054302];
ValuationDate = '15-Nov-2011';
StartDates = ValuationDate;
EndDates = {'15-Nov-2012';'15-Nov-2013';'15-Nov-2014' ;'15-Nov-2015';'15-Nov-2016'};
Compounding = 1;
RateSpec = intenvset('ValuationDate', ValuationDate,'StartDates', StartDates,...
'EndDates', EndDates,'Rates', Rates, 'Compounding', Compounding)
```
```RateSpec =

FinObj: 'RateSpec'
Compounding: 1
Disc: [5x1 double]
Rates: [5x1 double]
EndTimes: [5x1 double]
StartTimes: [5x1 double]
EndDates: [5x1 double]
StartDates: 734822
ValuationDate: 734822
Basis: 0
EndMonthRule: 1

```

Create the floating-rate instrument using the following data:

```Settle ='15-Nov-2011';
Maturity = '15-Nov-2015';
```

Define the floating-rate note amortizing schedule.

```Principal ={{'15-Nov-2012' 100;'15-Nov-2013' 70;'15-Nov-2014' 40;'15-Nov-2015' 10}};
```

Build the HJM tree using the following data:

```MatDates = {'15-Nov-2012'; '15-Nov-2013';'15-Nov-2014';'15-Nov-2015';'15-Nov-2016';'15-Nov-2017'};
HJMTimeSpec = hjmtimespec(RateSpec.ValuationDate, MatDates);
Volatility = [.10; .08; .06; .04];
CurveTerm = [ 1; 2; 3; 4];
HJMVolSpec = hjmvolspec('Proportional', Volatility, CurveTerm, 1e6);
HJMT = hjmtree(HJMVolSpec,RateSpec,HJMTimeSpec);
```

Compute the price of the amortizing floating-rate note.

```Price = floatbyhjm(HJMT, Spread, Settle, Maturity, 'Principal', Principal)
```
```Price =

100.3059

```

Price a Collar with a Floating-Rate Note

Price a collar with a floating-rate note using the CapRate and FloorRate input argument to define the collar pricing.

Price a portfolio of collared floating-rate notes using the following data:

```Rates = [0.0287; 0.03024; 0.03345; 0.03861; 0.04033];
ValuationDate = '1-April-2012';
StartDates = ValuationDate;
EndDates = {'1-April-2013';'1-April-2014';'1-April-2015' ;...
'1-April-2016';'1-April-2017'};
Compounding = 1;
```

Create the RateSpec.

```RateSpec = intenvset('ValuationDate', ValuationDate,'StartDates', StartDates,...
'EndDates', EndDates,'Rates', Rates, 'Compounding', Compounding);
```

Build the HJM tree with the following data:

```MatDates = {'1-April-2013'; '1-April-2014';'1-April-2015';...
'1-April-2016';'1-April-2017';'1-April-2018'};
HJMTimeSpec = hjmtimespec(RateSpec.ValuationDate, MatDates);
Volatility = [.10; .08; .06; .04];
CurveTerm = [ 1; 2; 3; 4];
HJMVolSpec = hjmvolspec('Proportional', Volatility, CurveTerm, 1e6);
HJMT = hjmtree(HJMVolSpec,RateSpec,HJMTimeSpec);
```

Create the floating-rate note instrument.

```Settle ='1-April-2012';
Maturity = '1-April-2016';
Principal = 100;
```

Compute the price of two capped collared floating-rate notes.

```CapStrike = [0.04;0.055];
PriceCapped = floatbyhjm(HJMT, Spread, Settle, Maturity,...
'CapRate', CapStrike)
```
```PriceCapped =

98.9986
100.2051

```

Compute the price of two collared floating-rate notes.

```FloorStrike = [0.035;0.040];
PriceCollared = floatbyhjm(HJMT, Spread, Settle, Maturity,...
'CapRate', CapStrike, 'FloorRate', FloorStrike)
```
```PriceCollared =

99.9246
102.2321

```