[R-SIG-Finance] Valuation of FID

[Eric Berger]

Hi Christofer,
There is a tremendous amount of functionality in the C++ library QuantLib.
Some of that functionality can be easily accessed from R via the
package RQuantLib (developed by Dirk Eddelbuettel.)
I suggest you check QuantLib to see if they have pricing models for
Average Price Calls.
If so, then see if you can access those functions from RQuantLib. (If
not, you might need to access QuantLib with the help of Rcpp.)

Hope that helps,
Eric

On Tue, Jun 23, 2020 at 4:12 PM Christofer Bogaso
<bogaso.christofer using gmail.com> wrote:
>
> 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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