MATLAB: Generate prices for vanilla interest rate swaps from LIBOR curve

financialinstrumentsinterestliborMATLABrateswaptoolboxvanilla

The examples listed below invoke EDdata.xls, which quotes swap contracts in prices. I want to construct a program to produce prices for vanilla interest rate swaps based on a term structure of interest rates (a.k.a. the LIBOR curve). Is there a function like "curve2price" or a shortcut to create one?

liborfloat2fixed:<https://www.mathworks.com/help/fininst/liborfloat2fixed.html#examples https://www.mathworks.com/help/fininst/liborfloat2fixed.html#examples>

liborprice: <https://www.mathworks.com/help/fininst/liborprice.html?s_tid=doc_ta#examples>

Best Answer

MATLAB has a function "swapbyzero" which will enable you to generate prices based off vanilla interest rate swaps using a term structure of interest rates (zero curve). You can find more information below:

https://www.mathworks.com/help/fininst/swapbyzero.html

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MATLAB: How the oasbyhw function supports for stepped coupon bonds

The help documentation for "oasbyhw" function doesn't provide an example of how to use stepped coupon bonds. Below is a simple demo that could help you understand the usage of this feature, the key part is providing the coupon schedule as part of the "CouponRate" input.

% Zero Curve
Settle = datenum('15-Jun-2020');
ZeroRates = [0.0052 0.0055 0.0061 0.0073 0.0094 0.0119 0.0168 0.0222 0.0293 0.0307]';
ZeroDates = datemnth(Settle,[6 12*[1 2 3 4 5 7 10 20 30]]');
myRC = intenvset('Rates',ZeroRates,'StartDate',Settle,'EndDates',ZeroDates,...
'Basis',3,'Compounding',1);
% Bond information
CouponRate = {{'15-Jun-2025' .02;'15-Jun-2040' .03}};
Maturity = datenum('15-Jun-2040');
Price = 90;
ExerciseDates = [datenum('15-Jun-2034') datenum('15-Jun-2035') datenum('15-Jun-2036')];
Strikes = 100;
Period = 1;
% Build HW tree
AlphaHW = .1;
VolHW = .01;
myVolSpec = hwvolspec(Settle,Maturity,VolHW,Maturity,AlphaHW);
myTimeSpec = hwtimespec(Settle,cfdates(Settle,Maturity,Period),Period);
myHWTree = hwtree(myVolSpec,myRC,myTimeSpec);
% Compute OAS
[OAS,OAD,OAC] = oasbyhw(myHWTree,Price,CouponRate,Settle,Maturity,'call',Strikes,ExerciseDates,'Period')

MATLAB: Does SWAPBYZERO include the principal in its computation of the Interest Rate Swaps in MATLAB (R2013b)

As mentioned in the documentation (R2013b), the "Principal" parameter is a "notional" amount used to determine the cash flows, although there is no actual exchange of principal. So you should not set this parameter to zero. Although the cash flow outputs "RecCF" and "PayCF" do include principal amounts, this should not affect the computation of the swap price since the principal amounts in the two legs cancel each other out.

If you have access to John Hull textbook "Options, futures, and other derivatives", it is mentioned that:

"If the principal were exchanged at the end of the life of the swap, the nature of the deal would not be changed in anyway. The principal is the same for both the fixed and the floating payments. Exchanging $100 million for $100 million at the end of the life of the swap is a transaction that would have no financial value...."

An enhancement request has been submitted so that the cash flow outputs, "RecCF" and "PayCF", not include the notional principal at the end of the swap to reflect the actual mechanics of the swap.

Best Answer

Related Solutions

MATLAB: How the oasbyhw function supports for stepped coupon bonds

MATLAB: Does SWAPBYZERO include the principal in its computation of the Interest Rate Swaps in MATLAB (R2013b)

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