Bond Power Exchange Options

20 Pages Posted: 6 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 4, 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 un- derlying 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: F1, G4

Suggested Citation

Blenman, Lloyd P., Bond Power Exchange Options (May 4, 2021). Available at SSRN: https://ssrn.com/abstract=3839900 or http://dx.doi.org/10.2139/ssrn.3839900

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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