Pricing options embedded in debentures with credit risk

Resumo

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”.

Ficha do documento

Tipo

Artigo científico

Ano

2016

Instituição

Sociedade Brasileira de Econometria

Fonte

Repositório da FGV

Idioma

Inglês

Acesso

Acesso aberto

DOI

10.12660/bre.v36n12016.24027

Identificador

oai:repositorio.fgv.br:10438/26209

Temas

Economia

Palavras-chave

Embedded optionsTerm structure of interest ratesDebenturesHull & White modelOpções embutidasEstrutura a termo da taxa de jurosModelo de Hull e WhiteEconomiaAções (Finanças) - Opções para compraTaxas de juros