Questions tagged [embedded-options]
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12 questions
0 votes
0 answers
52 views
Bond with embedded call and put on the same date
Theoretically callable/puttable bond can have call option and put option on the very same date. Usually they have the same strike and that strike is 100, but let's say the C/P bond has put at 150 and ...
- 87
1 vote
1 answer
685 views
Interest Rates as Options
Fischer Black published a paper shortly before his death in 1995 considering interest rates as having embedded options when considering the "shadow real interest rate" and the real interest rate. From ...
- 755
2 votes
0 answers
288 views
Lottery calls on municipal bonds
I'm trying to independently price several municipal bonds with lottery calls. Based on market prices/yields I can tell that the price, ytw, etc. is not based upon the first viable call. What is the ...
2 votes
0 answers
77 views
Sub-Optimal exercise
I have seen exercise multiples applied to account for sub-optimal exercise of American style options in the case of employee share schemes (as the employees are irrational). I would like to know if ...
- 33
1 vote
1 answer
934 views
Lease Accounting / FX Embedded Derivatives: How to Value Floor / Cap Optionality Features
Suppose you have a lease agreement where the functional/domestic currency is RUB and the currency on which the lease is written USD. Let $S$ be the USD/RUB exchange rate (# of rubles per 1 dollar). ...
- 632
7 votes
1 answer
3k views
About Option Adjusted Spread, rate curves and bonds comparison
I have few questions about using OAS as a measure of risk: does OAS allow for comparison between bonds with and without embedded options (e.g. a callable bond against a plain vanilla one against a ...
- 2,193
3 votes
1 answer
354 views
Observed market price for the August-Greece-paid bonds were the NPV of the bond or of an option?
The bonds which Greece has paid had been valued by market as junk once, just before their payment. Given that the observed market value is the net present value of the instrument, why were they so low?...
- 738
4 votes
1 answer
416 views
Which approach is better for modeling option exercise strategies, rational or behavioral?
This question is most relevant to the evaluation of embedded options, such as the refinancing option granted to borrowers in the mortgage and bank loan markets, or the call option present in some ...
- 13.7k
6 votes
1 answer
3k views
How would I value a perpetual bond with an embedded option?
I am trying to work out how to value the following transactions. It should be straight forward, since it breaks down into a series of well known instruments, yet I am not sure how to evaluate it: ...
- 1,408
7 votes
1 answer
1k views
How to value a floor when a loan is callable?
Certain bank loans pay a spread above a floating-rate interest rate (typically LIBOR) subject to a floor. I would like to find the value of this floor to the investor. Assume for this example that ...
- 13.7k
11 votes
1 answer
407 views
How to handle coupon payments when pricing a bond with an embedded option?
I'm using a binomial tree to price a bond that has an embedded call or put option. On every node that has a coupon payment, do you include the coupon payment then max/min out the value, or do you max/...
- 579
9 votes
2 answers
2k views
Which risk-free rate to use to price a bond issued in one currency but convertible into equity in another?
A convertible bond denominated in USD is issued by an Indian company (with equity traded in INR). The bond will be repaid in USD and if converted into equity in the company, the conversion price will ...
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