In finance, a Bond+Option is a
capital guarantee product that provides an investor with a fixed, predetermined participation to an
option
Option or Options may refer to:
Computing
*Option key, a key on Apple computer keyboards
*Option type, a polymorphic data type in programming languages
*Command-line option, an optional parameter to a command
*OPTIONS, an HTTP request method
...
. Buying the
zero-coupon bond ensures the guarantee of the capital, and the remaining proceeds are used to buy an option.
Structure
As an example, we can consider a bond+call on 5 years, with
Nokia
Nokia Corporation (natively Nokia Oyj, referred to as Nokia) is a Finnish multinational telecommunications, information technology, and consumer electronics corporation, established in 1865. Nokia's main headquarters are in Espoo, Finlan ...
as an
underlying. Say it is a USD
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general ...
option, and that 5 year rates are 4.7%. That gives you a
zero-coupon bond price of
.
Say we are counting in units of $100. We then have to buy $79.06 worth of bonds to guarantee the 100 to be repaid at maturity, and we have $20.94 to spend on 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–Scholes price for the call, and that we strike the option
at the money
In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a ...
, the
volatility is the defining part here. A call on an underlying with
implied volatility of 25% will give you a
Black–Scholes price 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%.
The alternative is to simply buy the bond, which would return $126.49.
References
{{DEFAULTSORT:Bond Plus Option
Bonds (finance)
Derivatives (finance)