[h_mcallister]

I suspect the correct answer is that this has not been explicitly considered in the modelling done to date. Some other issues have recently been reported with respect to the dual currency deposit model under FpML 5-1; please see FpML issue 1054 (http://www.fpml.org/issues/view.php?id=1054), also related discussions on the FX working group (http://www.fpml.org/_wgmail/_fxwgmail/msg00178.html). The FX WG would welcome any input you may be able to offer on these issues. Best regards, Harry

[h_mcallister]

Hi Janelle, First I have to apologise for the very delayed reply – I should be registered to receive auto-notifications of new posts in this forum, but it doesn’t seem to have worked on this occasion. Next: I definitely would like to see digital options, constant maturity and range accrual swaps adopted in the Standard, not only as a matter of self-interest, but because I am convinced there is an appetite for these features among the wider Rates community. We made some progress on digital cap/floors last year, and my intention was to follow adoption of these with range accruals. The IRG-WG is operating in maintenance mode at the moment, but I want to bring a re-drafted digital cap/floor proposal back to the group in the near future. Once we have approval for this model, then I would be keen to follow with the other products. Best regards, Harry McAllister harry.mcallister@bnpparibas.com

[h_mcallister]

Hi, I wonder if you could expand on what you mean by compounding on the Fixed side (presumably of an Interest Rate Swap)? The reason compoundingMethod is not permitted on the fixed leg is that the values of the method (other than ‘None’) relate to the treatment of the margin component (if any) of the accrued interest amount i.e. whether it is recognised as paid interest, or rolled into the notional amount for the following period. These considerations do not apply on the fixed leg, where interest amounts are pre-determined (known at inception of the trade). It is not common practice to specify a fixed leg with differing calculation (accrual) and payment period frequencies. The only sense in which we ordinarily understand compounding to apply to the fixed leg is in calculating the single payment amount at termination on a zero-coupon leg (please correct me here if you know otherwise). Best regards, Harry McAllister Chair, IRD-WG

[h_mcallister]

If I understand correctly, you have a geared inverse floating payout, capped and floored at MaxCoupon and MinCoupon respectively. Let’s assume the following values for the purpose of this illustration: Index = 3M USD Libor BBA FixedRate = 8.5% MaxCoupon = 7.5% MinCoupon = 1.5% Gearing = 2.0 Then the following xml fragment shows how these values are deployed within calculationPeriodAmount: 100000000 USD USD-LIBOR-BBA 3 M -2.0 0.085 0.075 0.015 ACT/360

[h_mcallister]

Marc, Amit, No, a solution using cap/floorRateSchedule does not work, because these components do not carry the required meanings. Technically, from a risk perspective we can represent a range accrual as a strip of daily digital options, but this not ideal for confirmation purposes. We have an internal representation at BNPP, substituing a specialised rangeAccrualCalculation element for the rateCalculation group. We would be interested in bringing this as a proposal to the public standard – but the FpML standard does not support range accrual at the moment. Best regards, Harry

[h_mcallister]

I have produced a proposal on support for digital cap/floors in FpML – please see materials contained in DigitalCapFloorProposal.BNPParibas.zip, attached to FpML Issue #900 (http://www.fpml.org/issues/view.php?id=900)

[h_mcallister]

I think that the suggestion of using additionalPayment does not work, because the additionalPayments are deterministic – the cashflow will occur with specified magnitude on the specified date – whereas the option payoff is contingent on attaining the strike – this fact is unknown until the fixing. Second, a cap/floor digital payoff is usually expressed as a rate, applied to the notional for the applicable coverage (duration) and day-count convention, and this is not supported by a “payment” representation. Philip Leach at DTCC recently produced a propoal on digital cap/floors (see FpML Issue #900) and I have been working on a response.

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