Pricing and Hedging Bond Power Exchange Options in a Stochastic String Term-Structure Model
We study power exchange options written on zero-coupon bonds under a stochastic string term-structure framework. Closed-form expressions for pricing and hedging bond power exchange options are obtained and, as particular cases, the corresponding expressions for call power options and constant underl...
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| Format: | Article |
| Language: | English |
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MDPI AG
2022-09-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/10/10/188 |
| _version_ | 1797469993057648640 |
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| author | Lloyd P. Blenman Alberto Bueno-Guerrero Steven P. Clark |
| author_facet | Lloyd P. Blenman Alberto Bueno-Guerrero Steven P. Clark |
| author_sort | Lloyd P. Blenman |
| collection | DOAJ |
| description | We study power exchange options written on zero-coupon bonds under a stochastic string term-structure framework. Closed-form expressions for pricing and hedging bond power exchange options are obtained and, as particular cases, the corresponding expressions for call power options and constant underlying elasticity in strikes (CUES) options. Sufficient conditions for the equivalence of the European and the American versions of bond power exchange options are provided and the put-call parity relation for European bond power exchange options is established. Finally, we consider several applications of our results including duration and convexity measures for bond power exchange options, pricing extendable/accelerable maturity zero-coupon bonds, options to price a zero-coupon bond off of a shifted term-structure, and options on interest rates and rate spreads. In particular, we show that standard formulas for interest rate caplets and floorlets in a LIBOR market model can be obtained as special cases of bond power exchange options under a stochastic string term-structure model. |
| first_indexed | 2024-03-09T19:31:30Z |
| format | Article |
| id | doaj.art-3815bdeec14d4c55b8a75a259ee58cde |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-09T19:31:30Z |
| publishDate | 2022-09-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-3815bdeec14d4c55b8a75a259ee58cde2023-11-24T02:23:05ZengMDPI AGRisks2227-90912022-09-01101018810.3390/risks10100188Pricing and Hedging Bond Power Exchange Options in a Stochastic String Term-Structure ModelLloyd P. Blenman0Alberto Bueno-Guerrero1Steven P. Clark2Department of Finance, University of North Carolina at Charlotte, 9201 University City Blvd, Charlotte, NC 28223, USADepartment of Economics, IES Francisco Ayala, 18014 Granada, SpainDepartment of Finance, University of North Carolina at Charlotte, 9201 University City Blvd, Charlotte, NC 28223, USAWe study power exchange options written on zero-coupon bonds under a stochastic string term-structure framework. Closed-form expressions for pricing and hedging bond power exchange options are obtained and, as particular cases, the corresponding expressions for call power options and constant underlying elasticity in strikes (CUES) options. Sufficient conditions for the equivalence of the European and the American versions of bond power exchange options are provided and the put-call parity relation for European bond power exchange options is established. Finally, we consider several applications of our results including duration and convexity measures for bond power exchange options, pricing extendable/accelerable maturity zero-coupon bonds, options to price a zero-coupon bond off of a shifted term-structure, and options on interest rates and rate spreads. In particular, we show that standard formulas for interest rate caplets and floorlets in a LIBOR market model can be obtained as special cases of bond power exchange options under a stochastic string term-structure model.https://www.mdpi.com/2227-9091/10/10/188stochastic string processterm-structure modelbond option pricingMalliavin calculus |
| spellingShingle | Lloyd P. Blenman Alberto Bueno-Guerrero Steven P. Clark Pricing and Hedging Bond Power Exchange Options in a Stochastic String Term-Structure Model Risks stochastic string process term-structure model bond option pricing Malliavin calculus |
| title | Pricing and Hedging Bond Power Exchange Options in a Stochastic String Term-Structure Model |
| title_full | Pricing and Hedging Bond Power Exchange Options in a Stochastic String Term-Structure Model |
| title_fullStr | Pricing and Hedging Bond Power Exchange Options in a Stochastic String Term-Structure Model |
| title_full_unstemmed | Pricing and Hedging Bond Power Exchange Options in a Stochastic String Term-Structure Model |
| title_short | Pricing and Hedging Bond Power Exchange Options in a Stochastic String Term-Structure Model |
| title_sort | pricing and hedging bond power exchange options in a stochastic string term structure model |
| topic | stochastic string process term-structure model bond option pricing Malliavin calculus |
| url | https://www.mdpi.com/2227-9091/10/10/188 |
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