Valuing Bonds with Embedded Average Price Options

Stephen A. Easton
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Stephen A. Easton: Associate Professor, Department of Accounting and Finance, Monash University, Clayton Victoria 3168.

Australian Journal of Management, 1996, vol. 21, issue 1, 29-40

Abstract: Average price options are based on the average (either arithmetic or geometric) price of the underlying asset during an option's life. Recently, Australia's largest private bank, the National Australia Bank, and the regional Metway Bank, have issued bonds that contain embedded arithmetic average share index options. The purpose of this paper is to value these options using Monte Carlo simulation, and then to value the bonds themselves. Using a wide range of estimates of the parameters that determine the values of these bonds, it would appear that the fixed-term deposits offered by these same banks represent more profitable investments.

Keywords: AVERAGE PRICE OPTIONS; BONDS; MONTE CARLO SIMULATION (search for similar items in EconPapers)
Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:21:y:1996:i:1:p:29-40

DOI: 10.1177/031289629602100105

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