The option-adjusted spread helps investors compare a fixed-income security's cash flows to reference rates, while also valuing embedded options
against general market volatility.
Also included in the statements are a number of bond characteristics necessary for specifying each bond's promised cash flow--such as the coupon rate, the month(s) in which the interest payments are made, the schedule of final maturity payments, and the terms of any embedded options
Be mindful that some asset/liability models may not be capable of producing the requisite yield curve scenarios or may be incapable of valuing embedded options
when calculating effective duration.
New international accounting standards require insurers to reflect the value of embedded options
and guarantees in their products.
But ownership rights may be more consequential in the built-in and embedded options
because the data and processes are integrated with the internal reporting data and processes, which may be integral to the company's competitive advantage.
The risky bond's yield must also be adjusted to account for other differences between the two types of bonds, such as embedded options
, because these would affect the bond's yield and be reflected in the credit spread.
He told FM that one of the main challenges facing gas suppliers was how to value embedded options
in wholesale gas purchase contracts.
Not only can they afford to pay a higher price and still make the purchase successful, but as large, sophisticated players in the variable-annuity marketplace, they also are in a better position to evaluate the pricing of embedded options
for each block of business.
The significant terms of a derivative that will need to be disclosed include (1) the notional, face, or contract amount; (2) interest rates, including terms such as caps, floors, or collars; (3) embedded options
(a call option written into a bond contract); (4) the date when the derivative became effective and when it is scheduled to terminate or mature: and (5) cash paid or received when the derivative was initiated.
arise in many tax-related decisions because of the ability to subsequently alter one's choices in response to changing conditions.
Funding instruments for complex wholesale borrowing can have embedded options
that may significantly increase over time a bank's sensitivity to market and liquidity risks.
Table 1 shows the NPV, the change in NPV, and the value of embedded options
for the above deferrable project at different possible levels of the short-term interest rate.