Amortizing Floor Option

An amortizing floor option consists of 12 floorlets, or put options, on the arithmetic average of the daily 12-month Pibor rate fixings over respective windows of approximately 30 calendar days. Furthermore the notional amount corresponding to each floorlet is specified by an amortization schedule.

We consider a floor option consisting of a series of floorlets as follows. Here each floorlet is specified by

Consider a floorlet with associated Pibor rate averaging window, and let T denote the corresponding settlement date. We assume that, for each reset in this window, the associated 12-month forward Pibor rate, L , satisfies an SDE, of the form

We note that, mathematically, the Pibor rates above cannot simultaneously be martingales under the common T-forward probability measure; moreover, in order to simultaneously express the Pibor rates above under this same measure, the SDE above requires a drift correction term.

Here the forward Pibor rate volatility, , is taken from a corresponding Euro forward swap rate volatility curve. Furthermore Pibor forward rates are calculated from a curve sheet of EURIBOR discount factors

Amortizing Floor Option

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