[R-SIG-Finance] Valuation of FID

[Eric Berger]

Christofer provided only a sketch of the structure, but presumably it
is part of a general class of financial instruments called Structured
Notes.
There is a very short entry in Wikipedia that gives a bit of a flavor.
https://en.wikipedia.org/wiki/Structured_note

Structured notes would normally have a "buyer" who pays the
issuer/sponsor when the deal is entered.
By contrast, swaps generally have a value of zero at initiation. (Pre
the 'big bang' in the CDS market, this was true of CDS swaps also.)


On Mon, Jun 22, 2020 at 3:44 PM Brian G. Peterson <brian using braverock.com> wrote:
>
> This sounds more like a swap contract than a bond. The principal is some quantity of S&P (futures, index value* some initial capital, something).
>
> Perhaps look at pricing swaps.
>
> --
>
> Brian
>
> On Sun, 2020-06-21 at 23:16 +0300, Eric Berger wrote:
>
> 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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