Notes On Bond Options Analysis Essay examples

Notes On Bond Options Analysis Essay examples

Length: 971 words (2.8 double-spaced pages)

Rating: Strong Essays

Open Document

Essay Preview

Further topics in Derivatives – Bond Options Analysis
PART A - Describe the payoffs to the product, and discuss how different parameter values result in changes in the price of the option using the DerivaGem software.
A bond option gives the option holder the right, but not obligation, to buy or sell a bond to option writer/seller, for a pre-determined price on or before a given time in the future. There are two types of options: Call and Put options. A call option give the holder the right to buy a bond, and the payoff of a call option is Maximum(St – K,0); while a put option give the holder the right to sell a bond and the payoff of a put option is Maximum(K – St,0). (Hull,2014)
In DerivaGem software, it can be seen that a call option price of European bond is 10.066 when strike price is 100, option life is 5, coupon rate is 8% and yield Volatility is 20%.
Firstly, it can be seen from DerivaGem software that increases Volatility from 20% to 40%, which results option price increased to 12.228, ceteris paribus.

It demonstrates that higher volatility results in higher option price. Volatility of a stock is a measure of uncertainty about the returns provided by the stock. When volatility is higher, the probability of option buyer to make high profit is higher and the risk of option seller is higher. In order to reduce the risk of option sellers, so option price will be higher. On the opposite, lower volatility, lower option price. (Hull,2014)

The second parameter is Strike Price. The strike price is the price at which the holders of option can buy/sell the underlying bond at the maturity date. Increases it from 100 to 105, which leads option price decreasing to 6.8747, ceteris paribus.

For call options, when th...


... middle of paper ...


...000- $3500= $10,500
Second one is without speculation: Net profit will be (40-35)*100=$500
In comparison, the profit with speculation is approximately up to 20 times than without speculation. However, options also may cause a huge loss of $3,500, which is the cost of options if the prices stay below $36. As a conclusion, if the investor bets right direction, then he/she can make big profits otherwise big losses. Speculation is a lot more risky than hedging.
References List:
Hull,J (2014). Fundamentals of Futures and Options Markets. 8th ed. London: Pearson. p210-215.
Hull,J (2012). Options,Futures,And Other Derivatives. 8th ed. Harlow: Pearson. p10-15.
Ross,S. (2015). How does a bond 's coupon interest rate affect its price?. Available:http://www.investopedia.com/ask/answers/111414/how-does-bonds-coupon-interest-rate-affect-its-price.asp. Last accessed 13th Mar 2016

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Analysis of Power Reverse Dual Currency Note Essay

- Power Reverse Dual Currency (PRDC) notes are an exotic financially structured product and are part of the Structured Notes Market. These instruments are utilized by investors to speculate or hedge in the forward foreign exchange market based on relative interest rate spreads between economies. Historically this hybrid security rooted from principal protected notes that became useful instruments for Japanese investors. Their utility was realized in 1995, when a sharp decline in Japanese yields generated demand for a product that could provide a higher yield than available domestically ("Pricing Power Reverse Dual Currency Notes")....   [tags: prdc, notes market, foreign exhange]

Strong Essays
982 words (2.8 pages)

Essay on Notes On Bond And Stock

- Assignment#1 Sijia Duan 5264643 ECON3P03 Bond is a kind of financial contract, which is issued by the government, financial institutions, industrial and commercial enterprises directly to the society to borrow money, issued to the investors, at the same time promised to pay interest at a certain rate and repay the principal according to the agreed conditions....   [tags: Finance, Stock, Stock market, Bond]

Strong Essays
866 words (2.5 pages)

Essay on Bonds, Bond, And Bond Bonds

- Generally, bonds are seen an instruments of indebtedness issued to the holder of the bond buy the bond In finance, a bond is an instrument of indebtedness of the bond issuer to the holders (Siegel and Yacht, 2009) . Bonds are fixed income security which the investors loan to an entity or corporate bodies for a. Money borrowed at a define period of time under a fixed interest rate. The debt holders are also known as the creditors of bond. The government or other large corporate bodies use bonds to raise money for their projects....   [tags: Stock, Bond, Time, Debt]

Strong Essays
825 words (2.4 pages)

Questions On The Bond Before Maturity And Recommendation Essay

- The purpose of this memo is to explain the conclusion reached to determine whether or not to call the bond before maturity and to offer recommendations if the decision is made to call the bond. This report will also include the advantages and disadvantages of using a long-term loan instead of a bond. Upon reviewing the contents of this memo, along with the calculations included in the appendix, the Finance Director should be able to make an assessment. … Brigham and Houston (2016) study found the following: “Most corporate bonds contain a call provision, which gives the issuing corporation the right to call the bonds for redemption....   [tags: Bond, Finance, Debt, Loan]

Strong Essays
704 words (2 pages)

A Standard Guide in Bond Investments Essay

- A Standard Guide in Bond Investments Millions of Americans are cautious as to how they invest their money or where they should invest their money; whether it’s to invest in real estate, stocks, and mutual funds; or take a safer approach by choosing a conservative options and invest in bonds. While establishing their financial planning, most American chose to invest in stocks and mutual funds because of the potential in hope of a larger return for their investment. Whereas, conservative bonds such as government and corporate bonds offer lots of potential and investment growth in the long run....   [tags: Bond Investment Finance Low Risk]

Strong Essays
2057 words (5.9 pages)

Chapter Notes On Family Bond Essay

- Chapter 5 The visitors have all gone – Bhumkia, Mehar, and her kids. The dinner’s been served to all the patients and the entire floor is quieting down. Jennifer has gone off duty and the duty nurse tonight isn’t as chatty as Jennifer. So, I relax and my mind wanders. At this point I’m still recollecting memories from India. It’s 7:30 in the morning… The center lobby of our house in Agartala. It’s a courtyard flanked by long verandahs on all sides leading to the different parts of the house, and this is where we have our meals....   [tags: Family, Mother, Grandparent, Father]

Strong Essays
2040 words (5.8 pages)

Essay on Freedom in Dostoevsky's Notes from Underground

- Freedom in Dostoevsky's Notes from Underground In Dostoevsky's Notes from Underground, the Underground Man proposes a radically different conception of free action from that of Kant. While Kant thinks that an agent is not acting freely unless he acts for some reason, the Underground Man seems to take the opposite stance: the only way to be truly autonomous is to reject this notion of freedom, and to affirm one's right to act for no reason. I will argue that the Underground Man's notion of freedom builds on Kant's, in that it requires self-consciousness in decision-making....   [tags: Notes From Underground]

Strong Essays
1805 words (5.2 pages)

The Pathological Protagonist of Dostoevsky’s Notes from the Underground

- The Pathological Protagonist of Dostoevsky’s Notes from the Underground Dostoevsky’s vision of the world is violent and his characters tortured; it is no wonder that many have viewed his work as prophetic of the 20th century. However, though Dostoevsky, in his unflinching portrayal of depravity, gives the Devil some of his best arguments, the Gospel often triumphs. Ivan Karamazov is at least offered the possibility of repentance when kissed by his saintly brother Alyosha. Raskolnikov, the nihilistic antihero of Crime and Punishment, is eventually redeemed through the love of the pure prostitute Sonja....   [tags: Notes from the Underground Essays]

Strong Essays
2589 words (7.4 pages)

Essay on Cash Flow Analysis of Saturn’s Five Options

- Cash Flow Analysis of Saturn’s Five Options Saturn has five options to choose from, each leading to different performance levels as shown on the income and cash flow statements. Selecting expansion at Spring Hill at full scale production is the optimal option, when basing the decision criteria purely on cash flow analysis. Spring Hill at full scale production leads to an overall net present value of $227,191,496. This value is $23,615,796 greater than the next best financial option (Willow Run)....   [tags: Business Analysis]

Free Essays
1023 words (2.9 pages)

Field Notes From a Catastrophe by Elizabeth Kolbert Essay

- Part 1: Summary In this book, Kolbert travels to many places to find out what is happening with global warming. Quite often she ran into the same fear at the places she went, the fear for loss before the next generation. When she went to Alaska, many people were fleeing from their homes because the sea ice surrounding them, creating a buffer zone for storms, was melting and that was causing houses to just be swept away. A man in Iceland who has monitored glaciers predicted that by the end of the century, Iceland will be ice free....   [tags: Kolbert Field Notes Catastrophe Book Analysis]

Free Essays
1701 words (4.9 pages)