Analyzing Municipal Derivatives with Munex
By Samir Dube
Jun 25, 2003, 12:38
I. Options Compute the value of the embedeed options in a municipal bond issue, select refunding candidates on the basis of refunding efficiency (the ratio of present value savings to option value), and solve for option adjusted TIC
II. Swaps & Swaptions Compute the swap rate or upfront payment given either variable for plainvanilla, forward starting fixed to variable or basis swaps or swaptions. Requires swap curve for variable components, amortization, and volatility. Methodology : binomial tree for each variable component, we value the resulting cashflow and arrive at a rate that would equate the two cashflows
III. Interest Rate Derivatives Compute the cost of an interest rate cap, floor & collar given variable rate curve, amortization, and volatility. Methodology : sum of caplets, binomial tree model to value the cash flow difference that would come into effect at any point the cap is triggered
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