Posted by
Luca Berardi on
Feb 25, 2005; 1:59am
URL: http://quantlib.414.s1.nabble.com/Possible-problem-on-bermuda-swaptions-2-tp3621p3633.html
You are right. But again you are assuming that exercise dates coincide with
payment dates of the swap. Let us generalize this a bit.
Assume for example to have a bermuda swaption written on a swap, issue date
5/3/04, fixed leg: annual, floating leg: semi-annual and assume today 25/2/05
is an exercise date. In valuing the swaption you have to consider the swap
starting 5/3/05, hence having first floating coupon at 5/9/05 and first fixed
coupon at 5/3/06.
This is what the trader of mine told me, also explaining that ten (business
days, actually) are standard for settlement operations between the two counterparts.
> Still on the exercise dates issue:
>
> Assume for simplicity that the floating and fixed leg of the
> underlying swap have the same schedule. In pricing the bermuda
> swaption one should discard the very successive payment after the
> current exercise date.
> If the floating and fixed leg have different schedules (e.g. funding
> leg pays quarterly and fixed annually) things get more complicated
> because all the swap cashflows following the current exercise dates
> must be discarded until we reach the second cashflow of the lower
> frequency leg.
Why the second cashflow? Let's say you have a swaption with exercise today
(Feb. 24, 2005) and the underlying swap paying annual fixed coupons and
receiving quarterly floating coupons. It is my understanding that if the
swaption were exercised, the holder would enter in a swap starting today;
i.e., he will not receive or pay coupons today (or the next few days) but
he will indeed receive floating payments in May 2005, August 2005, November
2005 and February 2006, and pay a fixed coupon in February 2006. Do you
think otherwise?
Later,
Luigi
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