Hi all,
I'm currently looking at a new type of swaption payoff. Underlying is a 20year fixed vs float swap on 3m USD LIBOR. The option is European, and can be exercised 10y after trade date. However, the strike is not set until 5yrs from the valuation date, and will be set to the ATMF for the swap as of that date.
I am struggling a little to understand how best one might approach valuation of this product at trade date, largely because I can't think of the clean hedging strategy for it. As a result, I also can't seem to see rational upper and lower bounds. I can think about as of the trade date working out what the ATMF would be for the swap, and then pricing a 10y20y European swaption, but I imagine I'm missing some important factors.
Any help would be much appreciated.
Thanks,
Donal