cirsens

Instrument sensitivities and prices from Cox-Ingersoll-Ross interest-rate model

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Syntax

[Delta,Gamma,Vega,Price] = cirsens(CIRTree,InstSet)

Description

[Delta,Gamma,Vega,Price] = cirsens(CIRTree,InstSet) computes dollar sensitivities and prices for instruments using a Cox-Ingersoll-Ross (CIR) interest rate tree created with cirtree. The CIR tree uses a CIR++ model with the Nawalka-Beliaeva (NB) approach.

Note

All sensitivities are returned as dollar sensitivities. To find the per-dollar sensitivities, divide by the respective instrument price.

cirsens handles the following instrument type values: 'Bond', 'CashFlow','OptBond', 'Fixed', 'Float', 'Cap', 'Floor', 'Swap','Swaption', 'RangeFloat', 'OptFloat', 'OptEmFloat'.

Note

Alternatively, you can use the Cap object to price cap instruments. For more information, see Get Started with Workflows Using Object-Based Framework for Pricing Financial Instruments.

example

Examples

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Open Live Script

Define and set up two bond instruments. Compute Delta and Gamma for the bond instruments contained in the instrument set. 

CouponRate= [0.035;0.04];
Settle= 'Jan-1-2017'; 
Maturity = 'Jan-1-2019'; 
Period = 1; 
InstSet = instbond(CouponRate, Settle, Maturity, Period)
InstSet = struct with fields:
        FinObj: 'Instruments'
    IndexTable: [1×1 struct]
          Type: {'Bond'}
     FieldName: {{11×1 cell}}
    FieldClass: {{11×1 cell}}
     FieldData: {{11×1 cell}}


instdisp(InstSet)
Index Type CouponRate Settle         Maturity       Period Basis EndMonthRule IssueDate FirstCouponDate LastCouponDate StartDate Face
1     Bond 0.035      01-Jan-2017    01-Jan-2019    1      0     1            NaN       NaN             NaN            NaN       100 
2     Bond 0.04       01-Jan-2017    01-Jan-2019    1      0     1            NaN       NaN             NaN            NaN       100

Create a RateSpec using the intenvset function. 

Rates = [0.035; 0.042147; 0.047345; 0.052707]; 
Dates = {'Jan-1-2017'; 'Jan-1-2018'; 'Jan-1-2019'; 'Jan-1-2020'; 'Jan-1-2021'}; 
ValuationDate = 'Jan-1-2017'; 
EndDates = Dates(2:end)'; 
Compounding = 1; 
RateSpec = intenvset('ValuationDate', ValuationDate, 'StartDates', ValuationDate, 'EndDates',EndDates,'Rates', Rates, 'Compounding', Compounding);

Create a CIR tree.

NumPeriods = length(EndDates); 
Alpha = 0.03; 
Theta = 0.02;  
Sigma = 0.1;   
Settle = '01-Jan-2017'; 
Maturity = '01-Jan-2019'; 
CIRTimeSpec = cirtimespec(Settle, Maturity, NumPeriods); 
CIRVolSpec = cirvolspec(Sigma, Alpha, Theta); 

CIRT = cirtree(CIRVolSpec, RateSpec, CIRTimeSpec)
CIRT = struct with fields:
      FinObj: 'CIRFwdTree'
     VolSpec: [1×1 struct]
    TimeSpec: [1×1 struct]
    RateSpec: [1×1 struct]
        tObs: [0 0.5000 1 1.5000]
        dObs: [736696 736878 737061 737243]
     FwdTree: {[1.0173]  [1.0276 1.0175 1.0097]  [1.0456 1.0331 1.0229 1.0151 1.0096]  [1.0644 1.0494 1.0368 1.0267 1.0188 1.0133 1.0100]}
     Connect: {[3×1 double]  [3×3 double]  [3×5 double]}
       Probs: {[3×1 double]  [3×3 double]  [3×5 double]}

Calculate the Delta and Gamma sensitivities for the two bonds.

[Delta, Gamma] = cirsens(CIRT,InstSet) 
Delta = 2×1

 -186.1885
 -187.5390


Gamma = 2×1

  532.8675
  536.3132

Input Arguments

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Interest-rate tree structure, specified by using cirtree.

Data Types: struct

Instrument variable containing a collection of NINST instruments, specified using instadd. Instruments are categorized by type; each type can have different data fields. The stored data field is a row vector or character vector for each instrument.

Data Types: struct

Output Arguments

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Rate of change of instruments prices with respect to changes in the interest rate, returned as a NINST-by-1 vector of deltas. Delta is computed by finite differences in calls to cirtree.

Note

Delta is calculated based on yield shifts of 100 basis points.

Rate of change of instruments deltas with respect to changes in the interest rate, returned as a NINST-by-1 vector of gammas. Gamma is computed by finite differences in calls to cirtree.

Note

Gamma is calculated based on yield shifts of 100 basis points.

Rate of change of instruments prices with respect to changes in the volatility, returned as a NINST-by-1 vector of vegas. Volatility is Sigma (t,T) of the interest rate. Vega is computed by finite differences in calls to cirtree. For information on the volatility process, see cirvolspec.

Note

Vega is calculated based on 1% shift in the volatility process.

Price of each instrument, returned as a NINST-by-1 vector. The prices are computed by backward dynamic programming on the interest-rate tree. If an instrument cannot be priced, a NaN is returned in that entry.

References

[1] Cox, J., Ingersoll, J.,and S. Ross. "A Theory of the Term Structure of Interest Rates." Econometrica. Vol. 53, 1985.

[2] Brigo, D. and F. Mercurio. Interest Rate Models - Theory and Practice. Springer Finance, 2006.

[3] Hirsa, A. Computational Methods in Finance. CRC Press, 2012.

[4] Nawalka, S., Soto, G., and N. Beliaeva. Dynamic Term Structure Modeling. Wiley, 2007.

[5] Nelson, D. and K. Ramaswamy. "Simple Binomial Processes as Diffusion Approximations in Financial Models." The Review of Financial Studies. Vol 3. 1990, pp. 393–430.

Version History

Introduced in R2018a

See Also

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