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Callable and putable option theta
The floorlets are valued using a stationary one-factor short rate model(Hull-White or Black-Karasinski) or the Black model. Volatility smile structure is taken intoaccount by calibrating the model parameters to the market prices of putzble the strike(s) and rate observation date(s) associated with the range accrualnote.Ideally, a callable range accrual note is valued using amodel that is consistent with both the market prices of swaptions andfloorlets.
The approach adopted h.