- Bond plus option
In finance, a Bond+Option is a
capital guaranteeproduct that provides an investor with a fixed, predetermined participation to an option. Buying the zero coupon bondensures the guarantee of the capital, and the remaining proceeds are used to buy an option.
As an example, we can consider a bond+call on 5 years, with
Nokiaas an underlying. Say it is a USD currencyoption, and that 5 year rates are 4.7%. That gives you a zero coupon bondprice of .
Say we are counting in units of $100. We then have to buy $79.06 worth of bond to guarantee the 100 to be repaid at maturity, and we have $20.94 to spend in an option. Now the option price is unlikely to be exactly equal to 20.94 in this case, and it really depends on the underlying. Say we are using the
Black-Scholesprice for the call, and that we strike the option at the money, the volatilityis the defining part here. A call on an underlying with implied volatilityof 25% will give you a Black-Scholesprice of $15.7 while with a volatility of 45%, you'd have to pay $21.76.
Hence the participation would be the proportion you can get with the money you have.
* In the 25% vol case you get a 133% participation
* In the 45% vol case, 96%.
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