On the pricing of GDP-linked financial products

Susanne Kruse, Matthias Meitner and Michael Schroder

Applied Financial Economics, 2005, vol. 15, issue 16, 1125-1133

Abstract: This paper discusses the pricing of GDP-linked financial products. GDP-linked bonds for instance are bonds which pay a coupon tied to the changes of GDP (Gross Domestic Product): if economic growth is low, the coupon decreases while a strong economic rise leads to a higher coupon. Therefore these innovative financial instruments are able to translate changes in the business cycle and long-term prospects into changes in the issuing country's debt service, taking into account GDP development. Against the background of a growing interest in macro-indexed financial instruments and Argentinas very recent offer to issue GDP-linked bonds, different characteristics of GDP-linked bonds are briefly discussed and a simple pricing approach for GDP-linked bonds and European options on GDP development is provided assuming a Black-Scholes type environment.

Date: 2005
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DOI: 10.1080/09603100500359260

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