I have a problem pricing the following swap. Swap is semiannually amortizing 30Y contract. At every payment date (payer point of view) there is a minimum amortization amount, but the (fixed rate) payer has the option to extra amortization accordin to minimum notional schedule. If the payer chooses to amortize this extra amount then the extra amount is deducted from all the following minimum amortizations. When interest rates are low (compared to the level of fixed rate) then the payer should amortize all he can...when the rates rise, the payer should stick to the minimum amortization amount. My problem is to price this optionality (option to extra amortization). Valuing the min. notional schedule is straight forward but since every extra amortization affects the future possible cash flows this product is highly path dependent. If one considers that at every payment date the payer has two choices: min amortization or max amortizationm, then the binomial tree is "non recombining".Anybody have any idea how to price this?

My first thought is to price it as a combination of bermudans. So, if you have a swap for the maximum amount, and then a set of bermudan swaptions (options on swaps that offset the original swap). Each bermudan can be fairly easily priced.

Risk magazineTechnical papers: Interest rates March 2005 | Volume18/No3Replication of flexi-swapsIngmar Evers and Farshid Jamshidian describe a relatively new product known as a flexi-swap and discuss its application in securitisation. A flexi-swap gives a counterparty an option to amortise the interest rate swap at an accelerated pace. They show that it can be replicated semi-statically by a vanilla amortising swap plus a portfolio of Bermudan swaptions. The derivation employs a novel ‘high-low interest rate path’ argument, which results in a simple algebraic formula for the weights