valuation hints needed
Posted: December 14th, 2011, 2:21 pm
Hi all,I got a new portfolio recently and inherited a pretty ugly structure with it. The security in question works similar to a shout option on interest rates. In the beginning of the year a reference swap rate is determined and the investor (aka me) has a year to "shout" in oder to lock in a coupon for that year. The coupon is then calculated as the absolute difference between the reference swap rate, the swap rate a the time of the shout and a gearing factor; roughly like this: . In case there is no shout the last swap rate in the time frame is used.This game goes on every year until maturity of the security (I'm reluctant to call it a bond or a derivative, really).The security also has a restructuring option, so if and when an investor is fed up with tracking the swap rate on a regular basis he or she can restructure the security into a normal coupon bearing senior unsecured bond.And that is why I need to find some method to valuate this thing as I don't want to get screwed too much by the issuing bank in case I want to restructure. Also the shout option clearly has some sensitivity upon volatility of the underlying swap rate and that might make a restructuring at the moment particularily interesting asthe implied volatility levels are pretty high at the moment.Is anybody aware of some papers detailing the valuation of some beast like this? I found some regarding shout options, but usually those are looking at equity only and I would be more confortable with one a bit closer to the matter at hand.Thanks in advance for any help or hints in the right direction...