Defining a Relative Strike, Cap Rate or Fixed Rate

Besides manually entering an instrument’s strike (i.e., a swaption’s fixed rate or a cap/floor’s cap/floor) as an absolute amount or using keyboard shortcuts (see Defining a Strike Using Keyboard Shortcuts) you can also define it using a relative index reference plus an optional spread. The system then calculates the absolute value using this definition.

This method is also supported for defining the cap rate and the fixed rate for a double period loan.

You define the relative index reference rate as follows:

<tenor> L <+ or -> <spread>

Where:

L is not case sensitive, and is used to represent the index reference regardless of the currency index. Therefore, if the currency is USD, L stands for LIBOR; if the currency is EUR, L stands for EURIBOR, etc.

The supported tenors are the tenors available for the index reference in the Based On field in the pricer window. For example, the Libor index for USD has 1M, 3M, 6M, 12M, so if the currency is USD then the tenor of the relative index reference can only be 1L, 3L, 6L or 12L.

The spread is optional, and by default it is assumed to be zero. The spread is defined as a percentage, with the sign + or -. That is, the spread is a percentage that is added to or subtracted from the index reference rate.

So for example if the currency is USD, 1L+2 means that the strike will be 1m Libor rate + 2%; if the currency is EUR, 1L+2 means the strike will be 1m Euribor + 2%. The relative index reference strike is displayed until the user clicks the Calculate button, or performs another action that triggers a calculation, such as deal capture. At that point the system calculates the strike using the last known fixing for the index reference rate. Once the relative strike has been converted into an absolute amount, the strike is not changed on subsequent calculation (unless you change it manually by entering another absolute value or enter another relative strike).