[R-SIG-Finance] Valuation of FID
Christofer Bogaso
bog@@o@chr|@to|er @end|ng |rom gm@||@com
Tue Jun 23 15:12:00 CEST 2020
With the caveat that the exact nature of this instrument is a bit
proprietary, Eric's solution quite fit to this pricing problem.
I am curious to understand if there is any implementation in R (or
other software like python) to price such Average Price Calls option.
Thanks,
On Mon, Jun 22, 2020 at 7:30 PM Brian G. Peterson <brian using braverock.com> wrote:
>
> 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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