[R-SIG-Finance] Valuation of FID

[Brian G. Peterson]

Eric,

Agreed that this could be constructed as a structured note.

In that case there is an initial principal payment, which may be
leveraged.  Additionally, the principal may be 'principal-protected',
or not.

A structured note may be priced like a swap (if the note is not
principal protected), or it may be priced with a zero coupon bond and
embedded call option (for a principal protected note) or as a more
complex structure depending on the waterfall of payments to note
holders.  Especially in a leveraged and non-principal-protected
structure, the payoffs can be quite complex.

As you point out, the OP did not give us [m]any details about the
contract specification for what he is trying to price.  So I think we
need more specifics to add any more clarity to this thread.

-- 
Brian


On Mon, 2020-06-22 at 15:59 +0300, Eric Berger wrote:
> 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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