optbndbyhjm

Price bond option from Heath-Jarrow-Morton interest-rate tree

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Syntax

[Price,PriceTree] = optbndbyhjm(HJMTree,OptSpec,Strike,ExerciseDates,AmericanOpt,CouponRate,Settle,Maturity)
[Price,PriceTree] = optbndbyhjm(___,Period,Basis,EndMonthRule,IssueDate,FirstCouponDate,LastCouponDate,StartDate,Face,Options)

Description

[Price,PriceTree] = optbndbyhjm(HJMTree,OptSpec,Strike,ExerciseDates,AmericanOpt,CouponRate,Settle,Maturity) calculates the price for a bond option from a Black-Karasinski interest-rate tree.

example

[Price,PriceTree] = optbndbyhjm(___,Period,Basis,EndMonthRule,IssueDate,FirstCouponDate,LastCouponDate,StartDate,Face,Options) adds optional arguments.

example

Examples

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Open Live Script

Using the HJM forward-rate tree in the deriv.mat file, price a European call option on a 4% bond with a strike of 96. The exercise date for the option is January 01, 2003. The settle date for the bond is January 01, 2000, and the maturity date is January 01, 2004.

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

load deriv.mat;

Use optbndbyhjm to compute the price of the 'Call' option.

[Price,PriceTree] = optbndbyhjm(HJMTree,'Call',96,datetime(2003,1,1), 0,0.04,datetime(2000,1,1),datetime(2004,1,1),1)
Price = 
2.2035

PriceTree = struct with fields:
    FinObj: 'HJMPriceTree'
      tObs: [0 1 2 3 4]
     PBush: {[2.2035]  [1×1×2 double]  [1×2×2 double]  [1×4×2 double]  [0 0 0 0 0 0 0 0]}
    ExBush: {[0]  [1×1×2 double]  [1×2×2 double]  [1×4×2 double]  [0 0 0 0 0 0 0 0]}

Input Arguments

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Interest-rate tree structure, specified by using hjmtree.

Data Types: struct

Definition of option, specified as a NINST-by-1 cell array of character vectors.

Data Types: char

Option strike price value, specified as a NINST-by-1 or NINST-by-NSTRIKES depending on the type of option:

  • European option — NINST-by-1 vector of strike price values.

  • Bermuda option — NINST by number of strikes (NSTRIKES) matrix of strike price values. Each row is the schedule for one option. If an option has fewer than NSTRIKES exercise opportunities, the end of the row is padded with NaNs.

  • American option — NINST-by-1 vector of strike price values for each option.

Data Types: double

Option exercise dates, specified as a NINST-by-1, NINST-by-2, or NINST-by-NSTRIKES vector using a datetime array, string array, or date character vectors, depending on the type of option:

  • For a European option, use a NINST-by-1 vector of dates. For a European option, there is only one ExerciseDates on the option expiry date.

  • For a Bermuda option, use a NINST-by-NSTRIKES vector of dates.

  • For an American option, use a NINST-by-2 vector of exercise date boundaries. The option can be exercised on any date between or including the pair of dates on that row. If only one non-NaN date is listed, or if ExerciseDates is a NINST-by-1 vector, the option can be exercised between ValuationDate of the stock tree and the single listed ExerciseDates.

To support existing code, optbndbyhjm also accepts serial date numbers as inputs, but they are not recommended.

(Optional) Option type, specified as NINST-by-1 positive integer flags with values:

  • 0 — European/Bermuda

  • 1 — American

Data Types: double

Bond coupon rate, specified as an NINST-by-1 decimal annual rate or NINST-by-1 cell array, where each element is a NumDates-by-2 cell array. The first column of the NumDates-by-2 cell array is dates and the second column is associated rates. The date indicates the last day that the coupon rate is valid.

Data Types: double | cell

Settlement date for the bond option, specified as a NINST-by-1 vector using a datetime array, string array, or date character vectors.

Note

The Settle date for every bond is set to the ValuationDate of the HJM tree. The bond argument Settle is ignored.

To support existing code, optbndbyhjm also accepts serial date numbers as inputs, but they are not recommended.

Maturity date, specified as an NINST-by-1 vector using a datetime array, string array, or date character vectors.

To support existing code, optbndbyhjm also accepts serial date numbers as inputs, but they are not recommended.

(Optional) Coupons per year, specified as an NINST-by-1 vector.

Data Types: double

(Optional) Day-count basis, specified as a NINST-by-1 vector of integers.

  • 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

For more information, see Basis.

Data Types: double

(Optional) End-of-month rule flag is specified as a nonnegative integer using a 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.

Data Types: double

(Optional) Bond issue date, specified as an NINST-by-1 vector using a datetime array, string array, or date character vectors.

To support existing code, optbndbyhjm also accepts serial date numbers as inputs, but they are not recommended.

(Optional) Irregular first coupon date, specified as an NINST-by-1 vector using a datetime array, string array, or date character vectors.

To support existing code, optbndbyhjm also accepts serial date numbers as inputs, but they are not recommended.

When FirstCouponDate and LastCouponDate are both specified, FirstCouponDate takes precedence in determining the coupon payment structure. If you do not specify a FirstCouponDate, the cash flow payment dates are determined from other inputs.

(Optional) Irregular last coupon date, specified as a NINST-by-1 vector using a datetime array, string array, or date character vectors.

To support existing code, optbndbyhjm also accepts serial date numbers as inputs, but they are not recommended.

In the absence of a specified FirstCouponDate, a specified LastCouponDate determines the coupon structure of the bond. The coupon structure of a bond is truncated at the LastCouponDate, regardless of where it falls, and is followed only by the bond's maturity cash flow date. If you do not specify a LastCouponDate, the cash flow payment dates are determined from other inputs.

(Optional) Forward starting date of payments (the date from which a bond cash flow is considered), specified as a NINST-by-1 vector using a datetime array, string array, or date character vectors.

To support existing code, optbndbyhjm also accepts serial date numbers as inputs, but they are not recommended.

If you do not specify StartDate, the effective start date is the Settle date.

(Optional) Face or par value, specified as anNINST-by-1 vector.

Data Types: double

(Optional) Derivatives pricing options, specified as structure that is created with derivset.

Data Types: struct

Output Arguments

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Expected price of the bond option at time 0, returned as a NINST-by-1 matrix.

Structure containing trees of vectors of instrument prices and accrued interest, and a vector of observation times for each node. Values are:

  • PriceTree.PBush contains the clean prices.

  • PriceTree.tObs contains the observation times.

  • PriceTree.ExBush contains the exercise indicator arrays. Each element of the cell array is an array containing 1's where an option is exercised and 0's where it isn't.

More About

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Version History

Introduced before R2006a

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See Also

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