[R-SIG-Finance] Valuation of FID

[Eric Berger]

Hi Christofer,
For this instrument its value today would be the sum of the present
value (pv) of its coupons and the pv of its redemption value.
You have not specified how the redemption value is determined, so I
won't deal with it. Regarding the coupons, you also did not say the
rate of the coupon, so let's say that is fixed, say at C (e.g. C=3%).
Each coupon appears to be C x (Avg Value of the Index), which seems to
be like holding C of an Average Rate Option (with a zero strike
price), also called an Average Price option (in this case an Average
Price Call). Since each coupon is a position in such an option, the
set of coupons is a portfolio of Average Price Calls. Hull and White
discuss valuation for such options, including a reference to Kemna and
Vorst (1990) who treated the case when the average is calculated as a
geometric average and the option is European.

Hopefully this provides enough clues for you to take it from here.

Best,
Eric

On Sun, Jun 21, 2020 at 10:47 PM Christofer Bogaso
<bogaso.christofer using gmail.com> wrote:
>
> Hi,
>
> I had placed this question in some other forums, however failed to
> garner sufficient information till date. Presenting the same here
> hoping to get some insightful ideas from experts here.
>
> Typically in a Bond the Principal is constant over it's life. However
> I have come across a Bond whose principal is variable, say, average of
> S&P quote for the last one month and coupon is paid based on that,
> coupon rate being constant. I was looking for some idea how such bond
> can be priced?
>
> Any idea will be highly appreciated.
>
> Thanks and regards,
>
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