Financial Derivatives
Toolbox™ Release Notes
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Financial Derivatives Toolbox™ Release Notes
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Summary by Version ............................... 1
Version 5.5.1 (R2010a) Financial Derivatives Toolbox
Software
Version 5.5 (R2009b) Financial Derivatives Toolbox
Software
Version 5.4 (R2009a) Financial Derivatives Toolbox
Software
Version 5.3 (R2008b) Financial Derivatives Toolbox
Software
Version 5.2 (R2008a) Financial Derivatives Toolbox
Software
........................................ 4
........................................ 5
........................................ 7
........................................ 10
........................................ 13
Contents
Version 5.1 (R2007b) Financial Derivatives Toolbox
Software
Version 5.0 (R2007a) Financial Derivatives Toolbox
Software
Version 4.1 (R2006b) Financial Derivatives Toolbox
Software
Version 4.0.1 (R2006a) Financial Derivatives Toolbox
Software
Version 4.0 (R14SP3) Financial Derivatives Toolbox
Software
Version 3.0 (R14) Financial Derivatives Toolbox
Software
........................................ 17
........................................ 20
........................................ 24
........................................ 25
........................................ 26
........................................ 30
iii
Compatibility Summary for Financial Derivatives
Toolbox Software
................................ 33
iv Contents
SummarybyVersion
This table provides quick access to what’s new in each version. For
clarification, see “Using Release Notes” on page 2 .
Financial Derivatives Toolbox™ Release Notes
Version
(Release)
Latest Versi
V5.5.1 (R201
V5.5 (R2009b)
V5.4 (R2009a)
V5.3 (R2
V5.2 (R2008a)
V5.1 (R2007b)
V5.0
V4.1 (R2006b)
008b)
(R2007a)
New Features
and Changes
on
No No Bug Reports
0a)
Yes
Details
Yes
Details
Yes
Details
Yes
Details
Yes
ls
Detai
Yes
Details
No No Bug Reports No
Version
Compatibility
Considerations
No Bug Reports
No Bug Repor
No Bug Reports
No Bug Reports
No Bug Re
No Bug Reports No
Fixed Bugs
and Known
Problems
Includes fix
Includes fixes
Includes
Includes fixes
Includes fixes
ports
es
ts
fixes
Related
Documentation
at Web Site
Printable R elease
Notes: PDF
Current product
documentation
No
No
No
No
No
V4.0.1 (R2006a)
V4.0 (R14SP3)
V3.0 (R14)
No No Bug Reports No
Yes
Details
s
Ye
etails
D
No Bug Reports No
No
No bug fixes
No
1
Financial Derivatives Toolbox™ Release Notes
Using Release No
Use release note
• New features
• Changes
• Potential imp
Review the re
product (for
bugs, or comp
If you are up
review the c
you upgrad
What Is in t
New Featu
• New func
• Changes
s when upgrading to a new er version to learn about:
act o n your existing files and practices
lease notes for other M athWorks™ products required for this
example, MATLAB
atibility considerations in other products impact you.
grading from a softw are version other than the most recent one,
urrent release notes and all interim versions. For example, when
e from V1.0 to V1.2, review the release notes for V1.1 and V1.2.
he Release Notes
res and Changes
tionality
to existing functionality
tes
®
or Simulink®). Determine if enhancements,
Versio
When a n
versi
impac
Comp
Repo
in in
comp
Fix
The
vi
n Compatibility Considerations
ew feature or change introduces a reported incompatibil ity between
ons, the Compatibility Considerations subsection explains the
t.
atibility issues reported after the product release appear under Bug
rts at The MathWorks™ Web site. Bug fixes can sometimes result
compatibilities, so review the fixed bugs in Bug Reports for any
atibility impact.
ed Bugs and Known Problems
MathWorks offers a user-searchable Bug Reports database so you can
ew Bug Reports. The development team updates this database at release
2
SummarybyVersion
time and as more information becomes available. Bug Reports include
provisions for any known workarounds or file replacem ents. Information is
available for bugs existing in or fixed in Release 14SP2 or later. Information
is not avail able for all bugs in earlier releases.
Access Bug Reports using y our MathWorks Account.
3
Financial Derivatives Toolbox™ Release Notes
Version 5.5.1 (R2010a) Financial Derivatives Toolbox
Software
This table summ
New Features and
Changes
No No Bug Reports
Version
Compatibility
Considerations
There are no new features or changes in this version.
arizes what’s new in Version 5.5.1 (R2010a):
Fixed Bugs an d
Known Problems
Includes fixes
Related
Documentation at
Web Site
Printable Re
Notes: PDF
Current pro
documenta
lease
duct
tion
4
Version 5.5 (R2009b) Financial Derivatives Toolbox™ Software
Version 5.5 (R2009b) Financial Derivatives Toolbox
Software
New Features and
Changes
Yes
Details below
This table summ
Version
Compatibility
Considerations
No Bug Reports
New features and changes introduced in this version are:
• “Support for the Basket Option Instrument Using the Longstaff-Schwartz
Model and Nengjiu Ju Approximation Model” on page 5
• “Support for the BUS/252 Day-Count Convention” on page 6
arizes what’s new in Version 5.5 (R2009b):
Fixed Bugs an d
Known Problems
Includes fixes
Related
Documentation at
Web Site
No
SupportfortheBasketOptionInstrumentUsing
the L ongstaff-Schwartz Model and Nengjiu Ju
Approximation Model
Supports the following using the Longstaff-Schwartz model:
Functi
baske
bask
bas
on
tbyls
etsensbyls
ketstockspec
Purpos
Price
model
Calc
usin
Spec
e
basket options using the Longstaff-Schwartz
.
ulate price and sensitivities for basket options
g the Longstaff-Schwartz model.
ify basket stock structure.
Supports the following using the Nengjiu Ju approximation model:
5
Financial Derivatives Toolbox™ Release Notes
Function Purpose
basketbyju
basketsensbyju
For more information, see Basket Options in the Financial D erivatives
Toolbox™ User’s Guide documentation.
SupportfortheBUS/252Day-CountConvention
Support for the Basis day-count convention for BUS/252. BUS/252 is the
number of business days between the previous coupon payment and the
settlement data divided by 252. BUS/252 business days are non-weekend,
non-holiday days. The
Price basket options using the Nengjiu Ju m odel.
Calculate price and sensitivities for basket options
using the Nengjiu Ju model.
holidays.m file defines holidays.
6
Version 5.4 (R2009a) Financial Derivatives Toolbox™ Software
Version 5.4 (R2009a) Financial Derivatives Toolbox
Software
New Features and
Changes
Yes
Details below
This table summ
Version
Compatibility
Considerations
No Bug Reports
New features and changes introduced in this version are:
• “Support for European Digital Options Using the Black-Scholes Pricing
Model” on page 7
• “Support for European Rainbow Options Using the Stulz Option Pricing
Model” on page 8
• “Support for Caps and Floors Using the Black Option Pricing Model” on
page 9
• “Support for Calibrating the Hull-White Model Using Market Data of Caps
and Floors” on page 9
arizes what’s new in Version 5.4 (R2009a):
Fixed Bugs an d
Known Problems
Includes fixes
Related
Documentation at
Web Site
No
Support for European Digital Options Using the
Black-Scholes Pricing Model
Supports the following:
Funct
cash
etbybls
ass
pbybls
ga
ion
bybls
Purpo
Calc
opti
Cal
opt
Ca
th
se
ulate price of cash-or-nothing digital
ons using the Black-Scholes model.
culate price o f asset-or-nothing digital
ions using the Black-Scholes model.
lculate price of gap digital opti on s using
e Black-Scholes model.
7
Financial Derivatives Toolbox™ Release Notes
Function Purpose
supersharebybls
cashsensbybls
assetsensbybls
gapsensbybls
supersharesensbybls
For more information, see “Digital Option”.
Calculate price of supershare digital options
using the Black-Scholes model.
Calculate price and sensitivities of
cash-or-nothing digital options using the
Black-Scholes model.
Calculate price and sensitivities of
asset-or-nothing digital options using the
Black-Scholes model.
Calculate price and sensitivities of gap
digital options using the Black-Scholes
model.
Calculate price and sensitivities of
supershare digital options using the
Black-Scholes model.
Support for European Rainbow Options Using the
Stulz Option Pricing Model
Supports the following:
Function Purpose
minassetbystulz
minassetsensbystulz
maxassetbystulz
maxassetsensbystulz
8
Calculate European rainbow option price on
minimum of two risky assets using the Stulz
option pricing model.
Calculate E uropean rainbow option prices
and sensitivities on minimum of two risky
assets using the Stulz pricing model.
Calculate European rainbow option price on
maximum of two risky assets using the Stulz
option pricing model.
Calculate E uropean rainbow option prices
and sensitivities on maximum of two risky
assets using the Stulz pricing model.
Version 5.4 (R2009a) Financial Derivatives Toolbox™ Software
For more information, see “Rainbow Option”.
Support for Caps and F loors Using the Black Option
Pricing Model
Supports the following:
Function Purpose
capbyblk
floorbyblk
For more info rmation, see “Interest-Rate Derivatives Using Closed Form
Solutions”.
PricecapsusingtheBlackoptionpricingmodel.
Price floors using the Black option pricing m od el .
Support for Calibrating the Hull-White Model Using
Market Data of Caps and Floors
Supports the following:
Function Purpose
hwcalbycap
hwcalbyfloor
For more information, see “Calibrating the Hull-White Model Using Market
Data”.
Calibrate Hull-White tree using caps.
CalibrateHull-Whitetreeusingfloors.
9
Financial Derivatives Toolbox™ Release Notes
Version 5.3 (R2008b) Financial Derivatives Toolbox
Software
New Features and
Changes
Yes
Details below
This table summ
Version
Compatibility
Considerations
No Bug Reports
New features and changes introduced in this version are:
• “Support for European Chooser Options Using the Black-Scholes Mo del”
on page 10
• “Support for the Black Model for European Options ” on page 11
• “Support for the Black-Scholes Model for European Options with Different
Type of Dividends” on page 11
• “Support for the Bjerksund-Stensland Model for American Options with
Continuous Dividend” on page 11
• “Support for the Roll-Geske-Whaley Model for American Call Options with
a Single Cash Dividend” on page 12
• “Enhancements to
arizes what’s new in Version 5.3 (R2008b):
Fixed Bugs an d
Known Problems
Includes fixes
stockspec”onpage12
Related
Documentation at
Web Site
No
10
Support for European Chooser Options Using the
Black-Scholes Model
Supports the following:
tion
Func
oserbybls
cho
ose
Purp
Prices European simple chooser options using the
Black-Scholes model.
Version 5.3 (R2008b) Financial Derivatives Toolbox™ Software
Support for the Black Model for European Options
Supports the following:
Function Purpose
optstockbyblk
optstocksensbyblk
impvbyblk
For more information on the Black model, see “Computing Prices and
Sensitivities Using the Black Model”.
Prices options using the Black option pricing model.
Calculates option prices and sensitivities on futures
using the Black pricing model.
Calculates implied volatility using the Black option
pricing model.
Support for the Black-Scholes Model for European
Options with Different Type of Dividends
Supports the following:
Function Purpose
optstockbybls
optstocksensbybls
impvbybls
For more information on the Black-Scholes model, see “Computing Prices and
Sensitivities Using the Black-Scholes Model”.
Prices options using the Black-Scholes option pricing
model.
Calculates option prices and sensitivities on futures
using the Black-Scholes option pricing model.
Calculate implied volatility using the Black–Scholes
option pricing model.
Support for the Bjerksund-Stensland Model for
American Options with Continuous Dividend
Supports the following:
11
Financial Derivatives Toolbox™ Release Notes
Function Purpose
optstockbybjs
optstocksensbybjs
impvbybjs
For more information on the Bjerksund-Stensland model, see “Computing
Prices and Sensitivities Using the Bjerksund-Stensland Model”.
Support for the Roll-Geske-Whaley Model for
American Call Options with a Single Cash Dividend
Supports the following:
Function Purpose
optstockbyrgw
optstocksensbyrgw
impvbyrgw
Prices options using the Bjerksund-Stensland option
pricing model.
Calculates option prices and sensitivities on futures
using the Bjerksund-Stensland option pricing model.
Calculates implied v olatility using the
Bjerksund-Stensland option pricing model.
Prices options using the Roll-Geske-Whaley option
pricing model.
Calculates option prices and sensitivities on futures
using the Roll-Geske-Whaley option pricing model.
Calculates implied v olatility using the
Roll-Geske-Whaley option pricing model.
12
For more information on the Roll-Geske-Whaley model, see “Computing
Prices and Sensitivities Using the Roll-Geske-Whaley Model”.
Enhancements to stockspec
stockspec is now capable of handling several instruments. This modified
implementation of
options using some of the equity models, such as the closed-form solutions
and analytical approximations. For the equity tree models,
only the fir st instrument represented in the structure
the equity tree.
stockspec is particularly useful when pricing equity
stockspec takes
StockSpec to build
Version 5.2 (R2008a) Financial Derivatives Toolbox™ Software
Version 5.2 (R2008a) Financial Derivatives Toolbox
Software
New Features and
Changes
Yes
Details below
This table summ
Version
Compatibility
Considerations
No Bug Reports
New features and changes introduced in this version are:
• “Pricing Callable and Puttable Bonds” on page 13
• “Support for Actual/365 (ISDA)” on page 14
arizes what’s new in Version 5.2 (R2008a):
Fixed Bugs an d
Known Problems
Includes fixes
Related
Documentation at
Web Site
No
Pricing Callable and Puttable Bonds
Supports the following pricing for callable and puttable bonds:
Functio
optemb
optembndbybk
optembndbyhjm
opt
instoptembnd
n
ndbybdt
embndbyhw
Purpose
Price bonds with embedded options by a
Black-Derman-Toy interest rate tree.
Price bonds with embedded options by a
Black-Karasinski interest-rate tree.
e bonds with embedded options by an
Pric
h-Jarrow-Morton interest-rate tree.
Heat
Price bonds with embedded options by a Hull-White
interest-rate tree.
Constructor for the 'Type', 'OptEmBond' instrument
bond option.
n addition, the following functions have been modified to support callable
I
nd puttable bonds:
a
13
Financial Derivatives Toolbox™ Release Notes
• instadd
• bdtprice
• hwprice
• hjmprice
• bkprice
• bdtsens
• hwsens
• hjmsens
• bksens
Support for Actual/365 (ISDA)
The following functions now support day count conventions for the basis
argument based on ISDA (Internation a l Swap Dealers Association) actual/365:
•
bondbybdt
14
• bondbybk
• bondbyhjm
• bondbyhw
• bondbyzero
• capbybdt
• capbybk
• capbyhjm
• capbyhw
• cfbybdt
• cfbybk
• cfbyhjm
• cfbyhw
• cfbyzero
• date2time
• disc2rate
• fixedbybdt
• fixedbybk
• fixedbyhjm
• fixedbyhw
• fixedbyzero
• floatbybdt
• floatbybk
• floatbyhjm
• floatbyhw
• floatbyzero
• floorbybdt
Version 5.2 (R2008a) Financial Derivatives Toolbox™ Software
• floorbybk
• floorbyhjm
• floorbyhw
• instbond
• instcap
• instcf
• instfixed
• instfloat
• instfloor
• instswap
• instswaption
• intenvset
• optbndbybdt
• optbndbybk
15
Financial Derivatives Toolbox™ Release Notes
• optbndbyhjm
• optbndbyhw
• rate2disc
• swapbybdt
• swapbybk
• swapbyhjm
• swapbyhw
• swapbyzero
• swaptionbybdt
• swaptionbybk
• swaptionbyhjm
• swaptionbyhw
• time2date
16
Version 5.1 (R2007b) Financial Derivatives Toolbox™ Software
Version 5.1 (R2007b) Financial Derivatives Toolbox
Software
New Features and
Changes
Yes
Details below
This table summ
Version
Compatibility
Considerations
No Bug Reports No
New features and changes introduced in this version are:
arizes what’s new in Version 5.1 (R2007b):
Fixed Bugs an d
Known Problems
Related
Documentation at
Web Site
ISMA Support for 30/360 Basis as a Variant of
30/360E with Annual Compounding
The following functions now support day count conventions for the basis
argument to support 30/360 International Securities Market Association
(ISMA) convention as a variant of 30/360E with annual compounding:
•
bondbybdt
• bondbybk
• bondbyhjm
• bondbyhw
• bondbyzero
• capbybdt
• capbybk
• capbyhjm
• capbyhw
• cfbybdt
• cfbybk
• cfbyhjm
17
Financial Derivatives Toolbox™ Release Notes
• cfbyhw
• cfbyzero
• date2time
• disc2rate
• fixedbybdt
• fixedbybk
• fixedbyhjm
• fixedbyhw
• fixedbyzero
• floatbybdt
• floatbybk
• floatbyhjm
• floatbyhw
18
• floatbyzero
• floorbybdt
• floorbybk
• floorbyhjm
• floorbyhw
• instbond
• instcap
• instcf
• instfixed
• instfloat
• instfloor
• instswap
• instswaption
• intenvset
• optbndbybdt
• optbndbybk
• optbndbyhjm
• optbndbyhw
• rate2disc
• swapbybdt
• swapbybk
• swapbyhjm
• swapbyhw
• swapbyzero
• swaptionbybdt
• swaptionbybk
• swaptionbyhjm
Version 5.1 (R2007b) Financial Derivatives Toolbox™ Software
• swaptionbyhw
• time2date
19
Financial Derivatives Toolbox™ Release Notes
Version 5.0 (R2007a) Financial Derivatives Toolbox
Software
New Features and
Changes
Yes
Details below
This table summ
Version
Compatibility
Considerations
No Bug Reports No
New features and changes introduced in this version are:
• “Pricing and Sensitivity from the Implied Trinomial Tree Stock Tree” on
page 20
• “Implied Trinomial Tree Utilities” on page 21
• “Enhancement to the treeviewer Function” on page 21
• “ISMA Support” on page 21
arizes what’s new in Version 5.0 (R2007a):
Fixed Bugs an d
Known Problems
Related
Documentation at
Web Site
Pricing and Sensitivity from the Implied Trinomial
Tree Stock Tree
The following table summarizes the functions supported for pricing and
sensitivity from implied trinomial trees.
20
ion
Funct
rice
ittp
ittsens
itttree
ttimespec
it
tockoptspec
s
Purpo
Price instruments by an implied trinomial tree.
Instrument sensitivities and prices by an implied
trinomial tree.
Bu
Sp
S
se
ild an implied trinomial stock tree.
ecify tim e structure for an implied trinomial tree.
pecify European stock options structure.
Version 5.0 (R2007a) Financial Derivatives Toolbox™ Software
Implied Trinomi
The following ta
trees.
Function Purpose
optstockbyitt
barrierbyitt
asianbyitt
lookbackb
compound
ble summarizes the functions supported for implied trinomial
yitt
byitt
al Tree Utilities
Price options on stocks by an implied trinomial tree.
Price barrie
Price Asian
Price lookb
Price compound options by an implied trinomial tree.
r options by an implied trinomial tree.
options by an implied trinomial tree.
ack op t ion from an im p li ed trinomial tree.
Enhancement to the treeviewer Function
The treeviewer function, which provides a graphical display of rates and
prices, has been modified to accept Implied Trinomial Trees (ITTs) as input.
ISMA Support
The following functions now support the International Securities Market
Association(ISMA)conventionforthe
•
bondbybdt
basis argument:
• bondbybk
• bondbyhjm
• bondbyhw
• bondbyzero
• capbybdt
• capbybk
• capbyhjm
• capbyhw
• cfbybdt
• cfbybk
21
Financial Derivatives Toolbox™ Release Notes
• cfbyhjm
• cfbyhw
• cfbyzero
• date2time
• disc2rate
• fixedbybdt
• fixedbybk
• fixedbyhjm
• fixedbyhw
• fixedbyzero
• floatbybdt
• floatbybk
• floatbyhjm
22
• floatbyhw
• floatbyzero
• floorbybdt
• floorbybk
• floorbyhjm
• floorbyhw
• instbond
• instcap
• instcf
• instfixed
• instfloat
• instfloor
• instswap
• intenvset
• optbndbybdt
• optbndbybk
• optbndbyhjm
• optbndbyhw
• rate2disc
• swapbybdt
• swapbybk
• swapbyhjm
• swapbyhw
• swapbyzero
• time2date
Version 5.0 (R2007a) Financial Derivatives Toolbox™ Software
23
Financial Derivatives Toolbox™ Release Notes
Version 4.1 (R2006b) Financial Derivatives Toolbox
Software
This table summ
New Features and
Changes
No No Bug Reports No
Version
Compatibility
Considerations
arizes what’s new in Version 4.1 (R2006b):
Fixed Bugs an d
Known Problems
Related
Documentation at
Web Site
24
Version 4.0.1 (R2006a) Financial Derivatives Toolbox™ S oftware
Version 4.0.1 (R2006a) Financial Derivatives Toolbox
Software
This table summ
New Features and
Changes
No No Bug Reports No
Version
Compatibility
Considerations
arizes what’s new in Version 4.0.1 (R2006a):
Fixed Bugs and
Known Problems
Related
Documentation at
Web Site
25
Financial Derivatives Toolbox™ Release Notes
Version 4.0 (R14SP3) Financial Derivatives Toolbox
Software
New Features and
Changes
Yes
Details below
This table summ
Version
Compatibility
Considerations
No Bug Reports No
New features and changes introduced in this version are:
• “New Interest Rate Models” on page 26
• “Recombining Trinomial Trees” on page 29
• “Enhancement to the treeviewer Function” on page 29
arizes what’s new in Version 4.0 (R14SP3):
Fixed Bugs an d
Known Problems
Related
Documentation at
Web Site
NewInterestRateModels
Two interest rate models have been introduced with Version 4.0:
• Hull-White (HW) model
The Hull-White model incorporates the initial term s tructure of interest
rates and the volatility term structure to build a trinomial recombining tree
of short rates. The resulting tree is used to value interest rate-dependent
securities. The implementation of the HW model in Financial Derivatives
Toolbox software is limited to one factor.
26
• Black-Karasinski (BK) model
The BK model is a single-factor, log-normal version of the Hull-White
model.
Hull-White and Black-Karasinski Functions
The following tables summarize the Black-Karasinski and Hull-White
functions by their category of usage.
Version 4.0 (R14SP3) Financial Derivatives Toolbox™ Software
Price and Sensitivity from Black-Karasinski Trees
Function Purpose
bkprice
bksens
Instrument prices from Black-Karasinski tree.
Instrument prices and sensitivities from
Black-Karasinski tree.
bktimespec
bktree
bkvolspec
Specify time structure for Black-Karasinski tree.
Construct Black-Karasinski interest-rate tree.
Specify Black-Karasinski interest-rate volatility
process.
Price and Sensitivity from Hull-White Trees
Function Purpose
hwprice
hwsens
hwtimespec
hwtree
hwvolspec
Instrument prices from Hull-White tree.
Instrument prices and sensitivities from Hull-White
tree.
Specify time structure for Hull-White tree.
Construct Hull-White interest-rate tree.
Specify Hull-White interest-rate volatility pr oce ss.
Black-Karasinski Utilities
Function Purpose
bondbybk
capbybk
cfbybk
fixedbybk
Price bond from Black-Karasinski interest-rate tree.
Price cap instrument from Black-Karasinski
interest-rate tree.
Price arbitrary set of cash flows from Black-Karasinski
interest-rate tree.
Price fixed-rate note from Black-Karasinski
interest-rate tree.
27
Financial Derivatives Toolbox™ Release Notes
Function Purpose
floatbybk
floorbybk
optbndbybk
swapbybk
Hull-White Utilities
Function Purpose
bondbyhw
capbyhw
cfbyhw
fixedbyhw
floatbyhw
floorbyhw
optbndbyhw
swapbyhw
Price floating-rate note from Black -K a rasin sk i
interest-rate tree.
Price floor instrumen t from Black-Karasin sk i
interest-rate tree.
Price bond option from Black-Karasinski interest-rate
tree.
Price swap instrument from Black-Karasinski
interest-rate tree.
Price bond from Hull-White interest-rate tree.
Price cap in stru ment from Hu l l- W hite interest-rate
tree.
Price arbitrary set o f cash flows from Hull-White
interest-rate tree.
Price fixed-rate note from Hull-White interest-rate
tree.
Price floating-rate note from Hull-White interest-rate
tree.
Price floor instrument from Hull-White interest-rate
tree.
Price bond option from Hull-White interest-rate tree.
Price swap instrument from HJM interest-rate tree.
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Version 4.0 (R14SP3) Financial Derivatives Toolbox™ Software
Tree Manipulation
Function Purpose
cvtree
mktrintree
trintreepath
trintreeshape
Convert inv erse discount tree to interest-rate tree.
Create recombining trinomial tree.
Extract entries from node of recombining trinomial
tree.
Retrieve shape of recombining trinomial tree.
Recombining Trinomial Trees
The interest-rate or price trees supported in this toolbox can be either
binomial (two branches per node) or trinomial (three branches per node).
Typically, binomial trees assume that u nderlying interest rates or p rices can
only either increase or decrease a t each node. Trinomial trees allow for a more
complex movement of rates or prices. With trinomial trees the movement
of rates or prices at each node is unrestricted (for example, up-up-up or
unchanged-down-down).
Enhancement to the treeviewer Function
The treeviewer function, which provides a graphical display of rates and
prices, h as been modified to display recombining trinomial trees.
29
Financial Derivatives Toolbox™ Release Notes
Version 3.0 (R14) Financial Derivatives Toolbox Software
This table summarizes what’s new in Version 3.0 (R14):
New Features and
Changes
Yes
Details below
Version
Compatibility
Considerations
No
New features and changes introduced in this version are:
• “Support for Equity Derivatives” on page 30
• “Enhancement to the treeviewer Function” on page 32
Fixed Bugs an d
Known Problems
No bug fixes
Related
Documentation at
Web Site
No
Support for Equity Derivatives
Starting with Version 3.0, Financial Derivatives Toolbox software supports
two types of recombining tree models to represent the evolution of stock
prices: the Cox-Ross-Rubinstein (CRR) model and the Equal Probabilities
(EQP) model. The CRR and EQP models are examples of discrete time
models. A discrete time model divides time into discrete bits, and prices can
be computed at these specific times only.
The CRR model is one of the most common methods used to model the
evolution of stock processes. T he strength of the CRR model lies in its
simplicity. It is a good model when dealing with a large number of tree levels.
The CRR model yields the correct expected value for each node of the tree and
provides a good approximation for the corresponding local volatility. The
approximation becomes better as the number of time steps represented in
the tree is increased.
30
The EQP model is another discrete time model. It has the advantage of
building a tree with the exact volatility in each tree node, even with small
numbers of time steps. It also provides better results than CRR in some given
trading environments, e.g., when s tock volatility is low and interest rates are
high. However, this additional precision causes increased complexity, which
is reflected in the number of calculations required to build a tree.
Version 3.0 (R14) Financial Derivatives Toolbox™ Software
New Functions in Version 3.0
The following set of functions has b een added to the toolbox for Version 3.0.
Price and Sensitivity from Cox-Ross-Rubinstein Trees
Function Purpose
crrprice
crrsens
crrtimespec
crrtimespec
Instrument prices from a CRR tree.
Instrument prices and sensitivities by a CRR tree.
Specify time structure for a CRR tree.
Construct a CRR stock tree.
Cox-Ross-Rubinstein Utilities
Function Purpose
asianbycrr
barrierbycrr
compoundbycrr
lookbackbycrr
optstockbycrr
Price Asian option by a CRR tree.
Price barrier option by a CRR tree.
Price compound option by a CRR tree.
Price lookback option by a CRR tree.
Price stock option by a CRR tree.
Price and Sensitivity from Equal Probabilities Binomial Trees
Function Purpose
eqpprice
eqpsens
eqptimespec
eqptree
Instrument prices from an EQP binomial tree.
Instrument prices and sensitivities from an EQP
binomial tree.
Specify time structure for EQ P tree.
Construct EQP stock tree.
31
Financial Derivatives Toolbox™ Release Notes
Equal Probabilities Tree Utilities
Function Purpose
asianbyeqp
barrierbyeqp
compoundbyeqp
lookbackbyeqp
optstockbyeqp
Instrument Portfolio Handling
Function Purpose
instasian
instbarrier
instcompound
instlookback
instoptstock
Price Asian option by an EQP tree.
Price barrier option by an EQP tree.
Price compound option by an EQP tree.
Price lookback option by an EQP tree.
Price stock option by an EQP tree.
Construct Asian option instrument.
Construct barrier option instrument.
Construct compound option instrument.
Construct lookback instrument.
Construct stock option.
32
Enhancement to the treeviewer Function
The treeviewer function, which provides a graphical display of rates and
prices, has been modified to accept Cox-Ross-Rubenstein (CRR) and Equal
Probabilities(EQP)equitytreesasinput.
Compatibility Summary for Financial Derivatives Toolbox™ S oftware
Compatibility Summar y for Financial Derivatives Toolbox
Software
This table summarizes new features and changes that might cause
incompatibilities when you upgrade from an earlier version, or wh en you
use files on multiple versions. Details are provided with the description of
the new feature or change.
Version (Release) New Features and Changes with Version
Compatibility Impact
Latest Version
V5.5.1 (R2010a)
V5.5 (R2009b)
V5.4 (R2009a)
V5.3 (R2008b)
V5.2 (R2008a)
V5.1 (R2007b)
V5.0 (R2007a)
V4.1 (R2006b)
V4.0.1 (R2006a)
V4.0 (R14SP3)
V3.0 (R14)
None
None
None
None
None
None
None
None
None
None
None
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