ResolutionIRO - Caps, Floors and Swaptions

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Benefits

With ResolutionIRO you are able to;

  • Easily model hedging strategies using simple structures such as caps, collars, floors
  • Examine strategies for extending or modifying interest rate swap positions
  • Estimate the marginal value impact of options embedded in bond instruments
  • Value underlying swaps and other interest rate products.

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Interest Rate Derivatives

Resolution Pro’s IRO (interest rate options) module provides valuation and risk management for a wide range of interest rate products. These include the simple closed-form models for Forward Rate Agreements (FRA’s), caps and floors, European bond options and European swaptions, as well as term structure models for Bermudan swaptions, bond options, and callable bonds.

Instruments covered

  • European Swaptions
  • Interest Rate Caps
  • Interest Rate Floors
  • Interest Rate Collars
  • Barrier Caps
  • Variable maturity swaps
  • Callable Bonds
  • Bond Options

Main Features

  • Normal and log-normal term structure models, with a provision for mean reversion
  • Value European caps, floors, and swaptions using either the adjusted Black model or a term structure model
  • American and Bermudan options valued using term structure models implemented in a stable and efficient trinomial tree
  • Calibrate the chosen term structure model to market data
  • Includes an integrated zero curve model


Hull White, Black Derman Toy, Ho Lee, Black Karasinski

The IRO component is designed to deal with a range of derivative instruments whose values are primarily dependent on the term structure of interest rates. The supported functions can be usefully split into two categories:

Log-Normal Model: For European style options where the underlying variable is assumed to have a log-normal distribution. The underlying might be an interest rate, yield, par swap rate, or bond price. In all of these cases, the option is valued using a variant of the Black (1976) model.

Term Structure Models: Bermudan swaptions and other related options are reliant on different interest rates at different points of time, and appropriate valuation models must therefore deal with the entire term structure of interest rates. Bermudan and American style instruments such as callable/puttable bonds, bond options, and swaptions can be valued using the following models:

  • Black-Derman-Toy (1990)
  • Hull and White (1993)
  • Ho and Lee (1986)
  • Black and Karasinski (1991)

Related Modules

Resolution Bonds - Fixed coupon bonds, FRNs, and money market instruments

Resolution Swaps - Zero curve construction and interest rate swap pricing


Pricing

Resolution has a straight-forward and fair pricing model for its products which ensures that our customers receive excellent value to meet their specific needs.

For information on our pricing plans please click here.

Since everyone has different requirements, we would be more than happy to talk to you regarding a customisable pricing solution. Contact us today.