Record Details

Pricing Options Embedded in Debentures with Credit Risk

Brazilian Review of Econometrics

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Field Value
 
Title Pricing Options Embedded in Debentures with Credit Risk
 
Creator Almeida, Caio; EPGE/FGV
Pereira, Leonardo Tavares; 3g Radar
 
Subject opções embutidas; estrutura a termo da taxa de juros; debêntures; modelo de Hull e White
G12; G13; C13
 
Description In this article, we develop a strategy to simultaneously extract a yield curve and price call options embedded in debentures subject to credit risk. The implementation is based on a combination of two methods: term structure estimation adopting the Nelson-Siegel model sequentially followed by the use of the spread-curve (term structure of debentures minus local inter-bank risk-free rate) to calibrate a trinomial tree for short-term interest rates making use of the Hull and White model (1993). The proposed methodology allows us to price embedded options making debentures with and without embedded options comparable on a common basis. As a consequence, since a large number of the existing Brazilian debentures contain embedded options, our methodology increases the number of debentures available to estimate a term structure for Brazilian local fixed income bonds. We illustrate the method by pricing a call option for a debenture issued by the company “Telefonica Brasil”.
 
Publisher Sociedade Brasileira de Econometria
 
Contributor CNPq
 
Date 2016-03-10
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
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Format application/pdf
 
Identifier http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/24027
10.12660/bre.v36n12016.24027
 
Source Brazilian Review of Econometrics; Vol 36, No 1 (2016); 21-42
Brazilian Review of Econometrics; Vol 36, No 1 (2016); 21-42
1980-2447
 
Language eng
 
Relation http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/24027/45679
 
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