hey guysnice to be a new comer heretoday got a question from a HR, given a floating leg bond with time to maturity T. now consider an option on this bond, the strike could be a fixed payment or sth and doesnt matter so much, then think abt the method used to value this optioncoz i know a little abt IR models, like 1-factor,2-factor or the like...let me recall sth i learned before abt pricing capletfirst sth like a forward rate over a certain period is taken as the numeraire (seems to be so, but not sure...forgot, sorry...), and then do the change of measure to get a martingale, by the risk neutral valuation, we can then calculate the fair price of such a capletso now, the question is: can i price that bond option mentioned above in the exact same way as the caplet pricing? if so, what should be taken to be the numeraire? if not, what pricing model is supposed to be used for this case? Thanks sooooo much for any kind help!!!

QuoteOriginally posted by: GP03first sth like a forward rate over a certain period is taken as the numeraire (seems to be so, but not sure...forgot, sorry...)In my opinion, basic things in IR like the pricing of a caplet should be completely understood before moving on to another IR topic.The usual practice when pricing an IR derivative paying out at time T is to change from the risk-neutral measure (the one associated to the bank account) to the T-measure (the one associated to P(0, T)) in order to separate the discount factor from the expectation of the payoff of the derivative. Once you've done this, a model like for example a (properly calibrated) HW1F model should do.

ok then, i will try, tks