[R-SIG-Finance] Valuation of FID

[Enrico Schumann]

On Tue, 23 Jun 2020, Christofer Bogaso writes:

> 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,

Other than RQuantLib, mentioned by Eric, you may want to
search for "Asian options".  I am sure there are several
implementations available in R, e.g. in packages
"fExoticOptions" and "derivmkts".  But please do check if
they really provide what you need.

kind regards
    Enrico

> 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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-- 
Enrico Schumann
Lucerne, Switzerland
http://enricoschumann.net