Bond Power Exchange Options
Posted: 5 May 2021
Date Written: May 5, 2021
We study power exchange options written on zero-coupon bonds under a stochastic string frame- work. We obtain closed-form expressions for pricing and hedging bond power exchange options and, as particular cases, the corresponding expressions for call power options and constant underlying elasticity in strikes (CUES) options. Suffi cient 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 this kind of option is also stated. Finally, we consider
several applications of our results including duration and convexity measures for bond power
exchange options, pric- ing 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.
Keywords: Stochastic string, power option, pricing, hedging, Malliavin calculus.
JEL Classification: G. F1
Suggested Citation: Suggested Citation