swaptionbycir

Price swaption from Cox-Ingersoll-Ross interest-rate tree

Syntax

[Price,PriceTree] = swaptionbycir(CIRTree,OptSpec,Strike,ExerciseDates,Spread,Settle,Maturity)

[Price,PriceTree] = swaptionbycir(___,Name,Value)

Description

[Price,PriceTree] = swaptionbycir(CIRTree,OptSpec,Strike,ExerciseDates,Spread,Settle,Maturity) prices swaption with a Cox-Ingersoll-Ross (CIR) tree using a CIR++ model with the Nawalka-Beliaeva (NB) approach.

Note

Alternatively, you can use the Swaption object to price a swaption instrument. For more information, see Get Started with Workflows Using Object-Based Framework for Pricing Financial Instruments.

[Price,PriceTree] = swaptionbycir(___,Name,Value) adds optional name-value pair arguments.

Examples

Price a Swaption Using a CIR Interest-Rate Tree

Define a 3-year put swaption.

Rates =0.075 * ones (10,1);   
Compounding = 2;    
StartDates = [datetime(2017,1,1);datetime(2017,7,1);datetime(2018,1,1);datetime(2018,7,1);datetime(2019,1,1);datetime(2019,7,1);datetime(2020,1,1);datetime(2020,7,1);datetime(2021,1,1);datetime(2021,7,1)];
EndDates = [datetime(2017,7,1);datetime(2018,1,1);datetime(2018,7,1);datetime(2019,1,1);datetime(2019,7,1);datetime(2020,1,1);datetime(2020,7,1);datetime(2021,1,1);datetime(2021,7,1);datetime(2022,1,1)];

ValuationDate = datetime(2017,1,1);      

Create a RateSpec using the intenvset function.

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

Create a CIR tree.

NumPeriods = length(EndDates); 
Alpha = 0.03; 
Theta = 0.02;  
Sigma = 0.1;    
Maturity = datetime(2023,1,1); 
CIRTimeSpec = cirtimespec(ValuationDate, Maturity, NumPeriods); 
CIRVolSpec = cirvolspec(Sigma, Alpha, Theta); 

CIRT = cirtree(CIRVolSpec, RateSpec, CIRTimeSpec)

CIRT = struct with fields:
      FinObj: 'CIRFwdTree'
     VolSpec: [1×1 struct]
    TimeSpec: [1×1 struct]
    RateSpec: [1×1 struct]
        tObs: [0 0.6000 1.2000 1.8000 2.4000 3 3.6000 4.2000 4.8000 5.4000]
        dObs: [736696 736915 737134 737353 737572 737791 738010 738229 738448 738667]
     FwdTree: {1×10 cell}
     Connect: {[3×1 double]  [3×3 double]  [3×5 double]  [3×7 double]  [3×9 double]  [3×11 double]  [3×13 double]  [3×14 double]  [3×15 double]}
       Probs: {[3×1 double]  [3×3 double]  [3×5 double]  [3×7 double]  [3×9 double]  [3×11 double]  [3×13 double]  [3×14 double]  [3×15 double]}

Use the following arguments for a 1-year swap and a 3-year swaption.

ExerciseDates = datetime(2020,1,1);
SwapSettlement = ExerciseDates;
SwapMaturity   = datetime(2022,1,1);
Spread = 0;
SwapReset = 2 ; 
Principal = 100;
OptSpec = 'put';  
Strike= 0.04;
Basis=1;

Price the swaption.

[Price,PriceTree] = swaptionbycir(CIRT,OptSpec,Strike,ExerciseDates,Spread,SwapSettlement,SwapMaturity,'SwapReset',SwapReset, ...
'Basis',Basis,'Principal',Principal)

Price = 
3.1537

PriceTree = struct with fields:
     FinObj: 'CIRPriceTree'
      PTree: {1×11 cell}
       tObs: [0 0.6000 1.2000 1.8000 2.4000 3 3.6000 4.2000 4.8000 5.4000 6]
    Connect: {[3×1 double]  [3×3 double]  [3×5 double]  [3×7 double]  [3×9 double]  [3×11 double]  [3×13 double]  [3×14 double]  [3×15 double]}
      Probs: {[3×1 double]  [3×3 double]  [3×5 double]  [3×7 double]  [3×9 double]  [3×11 double]  [3×13 double]  [3×14 double]  [3×15 double]}

Input Arguments

CIRTree — Interest-rate tree structure

structure

Interest-rate tree structure, specified by using cirtree.

Data Types: struct

OptSpec — Definition of option

character vector with values 'call' or 'put' | cell array of character vector with values 'call' or 'put' | string array with values "call" or "put"

Definition of the option as 'call' or 'put', specified as a NINST-by-1 cell array of character vectors or string arrays. For more information, see More About.

Data Types: char | cell | string

Strike — Strike swap rate values

decimal

Strike swap rate values, specified as a NINST-by-1 vector.

Data Types: double

ExerciseDates — Exercise dates for swaption

datetime array | string array | date character vector

Exercise dates for the swaption, specified as a NINST-by-1 vector or a NINST-by-2 vector using a datetime array, string array, or date character vectors, depending on the option type.

• For a European option, ExerciseDates are a NINST-by-1 vector of exercise dates. Each row is the schedule for one option. When using a European option, there is only one ExerciseDate on the option expiry date.

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

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

Spread — Number of basis points over reference rate

numeric

Number of basis points over the reference rate, specified as a NINST-by-1 vector.

Data Types: double

Settle — Settlement date

datetime array | string array | date character vector

Settlement date (representing the settle date for each swap), specified as a NINST-by-1 vector using a datetime array, string array, or date character vectors. The Settle date for every swaption is set to the ValuationDate of the CIR tree. The swap argument Settle is ignored. The underlying swap starts at the maturity of the swaption.

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

Maturity — Maturity date for swap

datetime array | string array | date character vector

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

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

Name-Value Arguments

Specify optional pairs of arguments as Name1=Value1,...,NameN=ValueN, where Name is the argument name and Value is the corresponding value. Name-value arguments must appear after other arguments, but the order of the pairs does not matter.

Before R2021a, use commas to separate each name and value, and enclose Name in quotes.

Example: [Price,PriceTree] = swaptionbycir(CIRTree,OptSpec, ExerciseDates,Spread,Settle,Maturity,'SwapReset',4,'Basis',5,'Principal',10000)

AmericanOpt — Option type

0 (European) (default) | integer with values 0 or 1

Option type, specified as the comma-separated pair consisting of 'AmericanOpt'and NINST-by-1 positive integer flags with values:

• 0 — European

• 1 — American

Data Types: double

SwapReset — Reset frequency per year for underlying swap

1 (default) | numeric

Reset frequency per year for the underlying swap, specified as the comma-separated pair consisting of 'SwapReset' and a NINST-by-1 vector or NINST-by-2 matrix representing the reset frequency per year for each leg. If SwapReset is NINST-by-2, the first column represents the receiving leg, and the second column represents the paying leg.

Data Types: double

Basis — Day-count basis of instrument

0 (actual/actual) (default) | integer from 0 to 13

Day-count basis representing the basis used when annualizing the input forward-rate tree for each instrument, specified as the comma-separated pair consisting of 'Basis' and a NINST-by-1 vector or NINST-by-2 matrix representing the basis for each leg. If Basis is NINST-by-2, the first column represents the receiving leg, while the second column represents the paying leg.

• 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

Principal — Notional principal amount

100 (default) | numeric

Notional principal amount, specified as the comma-separated pair consisting of 'Principal' and a NINST-by-1 vector.

Data Types: double

Output Arguments

Price — Expected prices of swaptions at time 0

vector

Expected prices of the swaptions at time 0, returned as a NINST-by-1 vector.

PriceTree — Tree structure of instrument prices

structure

Tree structure of instrument prices, returned as a MATLAB^® structure of trees containing vectors of swaption instrument prices and a vector of observation times for each node. Within PriceTree:

• PriceTree.PTree contains the clean prices.

• PriceTree.tObs contains the observation times.

• PriceTree.Connect contains the connectivity vectors. Each element in the cell array describes how nodes in that level connect to the next. For a given tree level, there are NumNodes elements in the vector, and they contain the index of the node at the next level that the middle branch connects to. Subtracting 1 from that value indicates where the up-branch connects to, and adding 1 indicated where the down branch connects to.

• PriceTree.Probs contains the probability arrays. Each element of the cell array contains the up, middle, and down transition probabilities for each node of the level.

More About

Swaption

A swaption (swap option) is a financial derivative that gives the holder the right, but not the obligation, to enter into an interest-rate swap agreement at a specified future date and under predetermined terms.

Swaptions are used by investors and institutions to hedge against interest rate fluctuations or to speculate on future changes in interest rates.

Call Swaption

A call swaption or payer swaption allows the option buyer to enter into an interest-rate swap in which the buyer of the option pays the fixed rate and receives the floating rate.

Put Swaption

A put swaption or receiver swaption allows the option buyer to enter into an interest-rate swap in which the buyer of the option receives the fixed rate and pays the floating rate.

References

[1] Cox, J., Ingersoll, J., and S. Ross. "A Theory of the Term Structure of Interest Rates." Econometrica. Vol. 53, 1985.

[2] Brigo, D. and F. Mercurio. Interest Rate Models - Theory and Practice. Springer Finance, 2006.

[3] Hirsa, A. Computational Methods in Finance. CRC Press, 2012.

[4] Nawalka, S., Soto, G., and N. Beliaeva. Dynamic Term Structure Modeling. Wiley, 2007.

[5] Nelson, D. and K. Ramaswamy. "Simple Binomial Processes as Diffusion Approximations in Financial Models." The Review of Financial Studies. Vol 3. 1990, pp. 393–430.

Version History

Introduced in R2018a

R2022b: Serial date numbers not recommended

Although swaptionbycir supports serial date numbers, datetime values are recommended instead. The datetime data type provides flexible date and time formats, storage out to nanosecond precision, and properties to account for time zones and daylight saving time.

To convert serial date numbers or text to datetime values, use the datetime function. For example:

t = datetime(738427.656845093,"ConvertFrom","datenum");
y = year(t)

y =

        2021

There are no plans to remove support for serial date number inputs.