Re: Possible problem on bermuda swaptions: 2

Posted by Luigi Ballabio on Feb 24, 2005; 2:17am
URL: http://quantlib.414.s1.nabble.com/Possible-problem-on-bermuda-swaptions-2-tp3621p3622.html

On 02/24/05 10:48:53, Luca Berardi wrote:
>
> as I told you in my previous email it seems to me there is a problem
> with rollback over hull-white trees. I wrote a piece of code
> reproducing it, which I'm sending out in the attachment.  This is the
> point: considering (discretized) discount bonds, they get initialized
> correctly (at 1.) but after rollback the have in some point of the
> tree, values greater than one, which seems unacceptable to me.

Luca,
        no, that is correct. The Hull-White model allows negative rates  
(I'm told it's a known weakness of the model) resulting in discounts  
greater than 1 in some regions of the tree.

Instead, the problem in the new release seems to be some date  
synchronization: namely, due to date adjustment it may happens that an  
exercise date is one or two days earlier than a fixed-coupon payment. This  
leads to incorrect pricing as the underlying of the option will include  
such payment---which it shouldn't. I'm testing a patch to fix the issue; I  
should be able to make it available in a few hours.

Later,
        Luigi

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Prediction is very difficult, especially of the future.
-- Niels Bohr