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From my understanding, I know that we can decompose a long callable bond into a long vanilla bond and short receiver swaption. However, I do not understand, how could I separate or calculate the swaption part?

From what I have learnt, swaption is a option on a fixed-float swap. But a FRN is paying a index rate with a spread, such that the rate is always variable. Then what could i set for the strike rate for the swaption?

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    $\begingroup$ What you have learnt applies only to fixed rate callable bonds. The swaption analysis is inappropriate for FRNs $\endgroup$
    – dm63
    Feb 27 at 11:24
  • $\begingroup$ @dm63 if I couldnt do swaption analysis, what is the practical way to calculate for the optionality part? for example, what kind of model could I use? $\endgroup$
    – Fangy
    Feb 28 at 2:46
  • $\begingroup$ What you have here is an option on the credit spread of the issuer. You would have to estimate the volatility of this spread and then you could plug it into a simple black model. You may not have enough data to calculate the historical vol. $\endgroup$
    – dm63
    Mar 14 at 10:11

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