An exchangeable bond is a type of hybrid security that may comprise of a straight bond with an embedded option
to exchange that bond (at a later date) for the stock of a company other than the issuer - such as a subsidiary of that issuing company.
The final price of the option is calculated as the difference of the bond without and with the embedded option
. It is also observable from tab 1 in the Appendix.
From the quick start link that opens, select the embedded option
and then pick Linux*.
In that case, the BCNs may not be considered readily convertible to cash and the embedded option
would not qualify as net settled and, therefore, would not be a derivative.
With these parameter estimates in hand, we use the Hull-White model to compute the option-adjusted duration for each bond with an embedded option
and generate the model-implied price and duration for the option-free bonds with missing price data.
The project is expected to be reviewed for full approval in the fourth quarter of 2012 and has an embedded option
to expand by a further 100 million mt/y.
This project has an embedded option
to expand by another 100 million tons per year.
Of course, our pricing model does not allow for more sophisticated financial hypothesis, such as stochastic volatility or jumps in the fund process and term-structure effects, but as Milevsky and Salisbury (2006) we are confident that these considerations will only increases the price of the embedded option
. The same effect would be obtained with the introduction of an actuarial model allowing for the longevity risk.
* A dual axis design, expandable to 6 axes, with an embedded option
for controlling bipolar stepper motors with currents of up to 2.5 A per phase and up to 35 VDC.
while capturing the entire value of that option.
Collateral is another type of embedded option
. By offering a bondholder the security associated with collateral, a company can issue the debt at a lower yield than the overall credit quality of the firm would dictate.