Pricing Structured Products – Matlab Code

In this Matlab code we implement a prepayment modeling method and eventually price Asset Backed Securities (ABS).


function price = MBS(k, theta)

%1a
P = 100000;
WACC = 0.08;
r = WACC / 12;
n = 360;
SY = [0.94 0.76 0.74 0.95 0.98 0.92 0.98 1.10 1.18 1.22 1.23 0.98];
SY = repmat(SY, 1, n);
WACC = repmat(WACC, n, 1)';
r10 = cir_rates(360, 120, 0.078, k, theta, 0.09);

RI = zeros(n + 1, 1); BU = zeros(n + 1, 1); SG = zeros(n + 1, 1);
CPR = zeros(n + 1, 1); w = zeros(n, 1); PV = zeros(n, 1);
c = zeros(n, 1); TPP = zeros(n + 1, 1);
PV(1) = P;

for i = 1 : n
w(i) = - 8.57 + 430 * (WACC(i) - r10(i));
RI(i + 1) = 0.28 + 0.14 * atan(w(i));
BU(i + 1) = 0.3 + 0.7 * PV(i) / PV(1);
SG(i + 1) = min(1, (i + 1) / 30);
CPR(i + 1)= RI(i + 1) * BU(i + 1) * SG(i + 1) * SY(i + 1);
TPP(i + 1) = PV(i) * r * (1 / (1 - (1 + r) ^ (- n + (i - 1))) - 1) + ...
(PV(i) - PV(i) * r * (1 / (1 - (1 + r) ^ (- n + (i - 1))) - 1)) * ...
(1 - (1 - CPR(i + 1)) ^ (1 / 12));
PV(i + 1) = PV(i) - TPP(i + 1);
c(i + 1) = PV(i) * r / (1 - (1 + r) ^ (- n + (i - 1))) + (PV(i) - ...
PV(i) * r * (1 / (1 - (1 + r) ^ (- n + (i - 1))) - 1)) * ...
(1 - (1 - CPR(i + 1)) ^ (1 / 12));
end

l = c(2 : 361).* cir_exp(360, 12, 0.078, k, theta, 0.09)';
price = mean(sum(l));

end

function r2 = cir_rates(N, S, r0, k, theta, sigma)

dt = 1 / S;
rep = r0 * ones(N, S);
z = sqrt(dt) * randn(N, S);

for i = 1 : S
for j = 1 : N
rep(j, i + 1) = rep(j, i) + dt * k * (theta - rep(j, i)) + sigma * sqrt(rep(j, i))
* z(j, i) ;
end
end

w = zeros(N, 1);
for j = 1 : N
w(j) = mean(rep(j, :));
end

r2 = w;
end

function r2 = cir_exp(N, S, r0, k, theta, sigma)

dt = 1 / S;
rep = r0 * ones(N, S);
z = sqrt(dt) * randn(N, S);

for i = 1 : S
for j = 1 : N
rep(j, i + 1) = rep(j, i) + dt * k * (theta - rep(j, i)) + sigma * ...
sqrt(rep(j, i)) * z(j, i) ;
end
end

Rf = zeros(1, N);
for i = 1 : N
Rf(i) = mean(rep(i, :)) * i * dt;
end

r2 = exp(- Rf);

end

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