PRICING AND CALIBRATION OF A CHOOSER FLEXIBLE CAP

In this paper, we deal with no-arbitrage pricing problems of a chooser flexible cap written on an underlying LIBOR. The chooser flexible cap allows a right for a buyer to exercise a limited and pre-determined number of the interim period caplets in a multiple-period cap agreement. Assuming a common diffusion short rate dynamics, e.g., Hull–White model, we propose a dynamic programming approach for their risk neutral evaluation. This framework is suited to a calibration from an observed initial yield curve and market price data of discount bonds, caplets, and floorlets.