# optemfloatbyhjm

Price embedded option on floating-rate note for Heath-Jarrow-Morton interest-rate tree

## Syntax

## Description

`[`

adds optional name-value pair arguments. `Price`

,`PriceTree`

]
= optemfloatbyhjm(___,`Name,Value`

)

## Examples

### Price European Callable Embedded Option for a Floating-Rate Note

Define the interest-rate term structure.

Rates = [0.03;0.035;0.040;0.045]; ValuationDate = datetime(2012,1,1); StartDates = [datetime(2012,1,1) ; datetime(2013,1,1) ; datetime(2014,1,1) ; datetime(2015,1,1)]; EndDates =[datetime(2013,1,1) ; datetime(2014,1,1) ; datetime(2015,1,1) ; datetime(2016,1,1)]; Compounding = 1;

Create the `RateSpec`

.

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

`RateSpec = `*struct with fields:*
FinObj: 'RateSpec'
Compounding: 1
Disc: [4x1 double]
Rates: [4x1 double]
EndTimes: [4x1 double]
StartTimes: [4x1 double]
EndDates: [4x1 double]
StartDates: [4x1 double]
ValuationDate: 734869
Basis: 0
EndMonthRule: 1

Build the HJM tree.

```
VolSpec = hjmvolspec('Constant', 0.01);
TimeSpec = hjmtimespec(RateSpec.ValuationDate, EndDates, Compounding);
HJMTree = hjmtree(VolSpec, RateSpec, TimeSpec)
```

`HJMTree = `*struct with fields:*
FinObj: 'HJMFwdTree'
VolSpec: [1x1 struct]
TimeSpec: [1x1 struct]
RateSpec: [1x1 struct]
tObs: [0 1 2 3]
dObs: [734869 735235 735600 735965]
TFwd: {[4x1 double] [3x1 double] [2x1 double] [3]}
CFlowT: {[4x1 double] [3x1 double] [2x1 double] [4]}
FwdTree: {[4x1 double] [3x1x2 double] [2x2x2 double] [1x4x2 double]}

The floater instrument has a spread of 15, a period of one year, and matures and is callable on Jan-1-2016.

```
Spread = 15;
Settle = datetime(2012,1,1);
Maturity = datetime(2016,1,1);
Period = 1;
OptSpec = {'call'};
Strike = 95;
ExerciseDates = datetime(2016,1,1);
```

Compute the price of the floater with the embedded call.

```
Price = optemfloatbyhjm(HJMTree, Spread, Settle, Maturity,...
OptSpec, Strike, ExerciseDates)
```

Price = 96.2355

## Input Arguments

`HJMTree`

— Interest-rate tree structure

binomial tree structure

Interest-rate tree specified as a structure by using `hjmtree`

.

**Data Types: **`struct`

`Spread`

— Number of basis points over the reference rate

nonnegative integer | vector of nonnegative integers

Number of basis points over the reference rate specified as
a vector of nonnegative integers for the number of instruments (`NINST`

)-by-`1`

).

**Data Types: **`double`

`Settle`

— Settlement dates of floating-rate note

`ValuationDate`

of BDT Tree (default) | datetime array | string array | date character vector

Settlement dates of floating-rate note specified as a
`NINST`

-by-`1`

vector using a datetime array, string
array, or date character vectors.

**Note**

The `Settle`

date for every floating-rate note with an embedded
option is set to the `ValuationDate`

of the HJM tree. The
floating-rate note argument `Settle`

is ignored.

To support existing code, `optemfloatbyhjm`

also
accepts serial date numbers as inputs, but they are not recommended.

`Maturity`

— Floating-rate note maturity date

datetime array | string array | date character vector

Floating-rate note maturity date specified as a
`NINST`

-by-`1`

vector using a datetime array, string
array, or date character vectors.

To support existing code, `optemfloatbyhjm`

also
accepts serial date numbers as inputs, but they are not recommended.

`OptSpec`

— Definition of option

character vector | cell array of character vectors

Definition of option as `'call'`

or `'put'`

specified
as a `NINST`

-by-`1`

cell array of
character vectors for `'call'`

or `'put'`

.

**Data Types: **`cell`

| `char`

`Strike`

— Option strike price values

nonnegative integer | vector of nonnegative integers

Option strike price values specified nonnegative integers using
as `NINST`

-by-`NSTRIKES`

vector
of strike price values.

**Data Types: **`double`

`ExerciseDates`

— Exercise date for option (European, Bermuda, or American)

datetime array | string array | date character vector

Exercise date for option (European, Bermuda, or American) specified as a
`NINST`

-by-`NSTRIKES`

or
`NINST`

-by-`2`

vector using a datetime array, string
array, or date character vectors.

To support existing code, `optemfloatbyhjm`

also
accepts serial date numbers as inputs, but they are not recommended.

If a European or Bermuda option, the

`ExerciseDates`

is a`1`

-by-`1`

(European) or`1`

-by-`NSTRIKES`

(Bermuda) vector of exercise dates. For a European option, there is only one`ExerciseDate`

on the option expiry date.If an American option, then

`ExerciseDates`

is a`1`

-by-`2`

vector of exercise date boundaries. The option exercises on any date between or including the pair of dates on that row. If there is only one non-`NaN`

date, or if`ExerciseDates`

is`1`

-by-`1`

, the option exercises between the`Settle`

date and the single listed`ExerciseDate`

.

### 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] =
optemfloatbyhjm(HJMTree,Spread,Settle,Maturity,OptSpec,Strike,ExerciseDates,'AmericanOpt',1,'FloatReset',6,'Basis',8)
```

`AmericanOpt`

— Option type

scalar | vector of positive integers`[0,1]`

Option type, specified as the comma-separated pair consisting of
`'AmericanOpt'`

and
`NINST`

-by-`1`

positive integer scalar flags with
values:

`0`

— European/Bermuda`1`

— American

**Data Types: **`double`

`FloatReset`

— Frequency of payments per year

`1`

(default) | positive integer from the set`[1,2,3,4,6,12]`

| vector of positive integers from the set
`[1,2,3,4,6,12]`

Frequency of payments per year, specified as the comma-separated pair consisting
of `'FloatReset'`

and positive integers for the values
`[1,2,3,4,6,12]`

in a
`NINST`

-by-`1`

vector.

**Note**

Payments on floating-rate notes (FRNs) are determined by the effective interest-rate between reset dates. If the reset period for an FRN spans more than one tree level, calculating the payment becomes impossible due to the recombining nature of the tree. That is, the tree path connecting the two consecutive reset dates cannot be uniquely determined because there will be more than one possible path for connecting the two payment dates.

**Data Types: **`double`

`Basis`

— Day-count basis of the instrument

`0`

(actual/actual) (default) | positive integers of the set `[1...13]`

| vector of positive integers of the set `[1...13]`

Day-count basis of the instrument, specified as the comma-separated pair consisting of
`'Basis'`

and a positive integer using a
`NINST`

-by-`1`

vector. The
`Basis`

value represents the basis used when annualizing the input
forward-rate tree.

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`

`EndMonthRule`

— End-of-month rule flag

`1`

(in effect) (default) | nonnegative integer [0,1]

End-of-month rule flag, specified as the comma-separated pair consisting of
`'EndMonthRule'`

and a nonnegative integer [`0`

,
`1`

] 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`

`Principal`

— Principal values

`100`

(default) | vector of nonnegative values | cell array of nonnegative values

Principal values, specified as the comma-separated pair consisting of
`'Principal'`

and nonnegative values using a
`NINST`

-by-`1`

vector or
`NINST`

-by-`1`

cell array of notional principal
amounts. When using a `NINST`

-by-`1`

cell array,
each element is a `NumDates`

-by-`2`

cell array 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.

**Data Types: **`double`

| `cell`

`Options`

— Structure containing derivatives pricing options

structure

Structure containing derivatives pricing options, specified as the comma-separated pair
consisting of `'Options'`

and a structure obtained from using
`derivset`

.

**Data Types: **`struct`

## Output Arguments

`Price`

— Expected prices of the floating-rate note option at time 0

scalar | vector

Expected prices of the floating-rate note option at time 0 are
returned as a scalar or an `NINST`

-by-`1`

vector.

`PriceTree`

— Structure of trees containing vectors of option prices at each node

tree structure

Structure of trees containing vectors of instrument prices and accrued interest and a vector of observation times for each node returned as:

`PriceTree.PBush`

contains the clean prices.`PriceTree.tObs`

contains the observation times.

## More About

### Floating-Rate Note with Embedded Options

A *floating-rate note with an embedded option*
enables floating-rate notes to have early redemption features.

A FRN with an embedded option gives investors or issuers the option to retire the outstanding principal prior to maturity. An embedded call option gives the right to retire the note prior to the maturity date (callable floater), and an embedded put option gives the right to sell the note back at a specific price (puttable floater).

For more information, see Floating-Rate Note with Embedded Options.

## Version History

**Introduced in R2013a**

### R2022b: Serial date numbers not recommended

Although `optemfloatbyhjm`

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.

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