Bond Power Exchange Options

Posted: 5 May 2021

See all articles by Lloyd P. Blenman

Lloyd P. Blenman

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law

Multiple version iconThere are 2 versions of this paper

Date Written: May 5, 2021

Abstract


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

Blenman, Lloyd P., Bond Power Exchange Options (May 5, 2021). Available at SSRN: https://ssrn.com/abstract=3839898

Lloyd P. Blenman (Contact Author)

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law ( email )

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Charlotte, NC 28223
United States
704-687-7705 (Phone)

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