This article explores the practical way of pricing Structured Bond named Callable Flipper Bond. Callable Flipper Bond is consisted of individual financial instruments such as straight coupon bond, forward start interest rate swap and Bermudan call option on inverse floater.
Hull-White One-factor Model was applied to price call option on Inverse Floater. GMM is used to estimate the parameters in Hull-White Model. The way of estimating parameters in this article is different from that of Hull-White its own. The parameters in Hull-White model such as θ(t), α, σ are regarded as constants in this article. The proxy of short-term interest rate would be 90 Days CD rate instead of T-Bill rate in Korea. Because of abnormal situation in Korean bond market the yields to which Hull-White trinomial tree is matched are not risk free yields (Treasury yield) but risky yields (Interest Rate Swap Rate).
Unfortunately when we calculate the price of straight coupon bond in CFB we cannot get proper YTM of 6-years Coupon Bond in Korean bond market. So the value of 6-years Coupon Bond in Callable Flipper Bond is calculated by the discount factors from swap curve instead of Yield To Maturity.
