Re: Re: Found the bug on bermuda swaptions

Posted by Luigi Ballabio on Mar 02, 2005; 6:44am
URL: http://quantlib.414.s1.nabble.com/Possible-problem-on-bermuda-swaptions-2-tp3621p3630.html

On 03/02/05 15:17:04, Luca Berardi wrote:
>
> I'm not sure I understand...what is the purpose of updating the fixed
> leg on payment dates and the floating leg on fixing dates? Am I missin
> something?

As for floating-coupons, and unless I'm missing something, they can only be  
updated that way since they are calculated by rolling a discount bond back.  
Fixed coupons can be updated both ways; but it is simpler and more  
efficient to add their amount directly on payment date than to roll another  
discount bond back, multiply the result by the coupon amount and add it.

> >When the exercise
> >date coincides with the coupon dates, the pricing is correct either way.
>
> Yes, provided you apply the patch to synchronize the dates. But even
> in this case we are introducing a (very) small error due to dates
> shifting, aren't we?

Yes, we are.
(on a related note: date shifting might not go away completely. When there  
is no exercise lag, we still have to make sure that the reset dates of the  
coupons we do want to include do not fall before the exercise)

> >However: yes, adding fixed coupons at their reset dates could make it
> >easier to implement the exercise lag. But it would not solve the general
> >problem.
>
> I do agree, but for practical purposes it doesn't matter. In fact
> usually exercise dates are few days (e.g. ten) before the dates where
> both the fixed and floating leg of the underlying swap pay (so I'm
> told).

Yes, that's all I ever saw too.

Later,
        Luigi

----------------------------------------

Perfection is reached, not when there is no longer anything to add, but
when there is no longer anything to take away.
-- Antoine de Saint-Exupery