An amortizing floor option is a type of floor option on Pibor. The floor 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.
For example, An annuity of 0.283% of the Outstanding Notional Amount paid on the Payment Dates (14 payments), paid on an annual, ACT/360 basis. The arithmetic average of the 12 month PIBOR Fixings as quoted on Reuters page PIBOR, for each calendar day from the November 1st to November 30th which immediately preceed the start of each period.
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.
We also note that the formal parameters includes a string input, “C” or “P”, to respectively denote call or put option calculation. The option calculation parameter input is not of the required form above. It appears from numerical tests, however, that in this case the addin defaults to a put option calculation.
We simultaneously express all the Pibor rate fixings in the averaging window under the common T-forward probability measure.
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