Embedded Options in Green Bonds and Designing Investment Strategies: A Study Based on the Black-Scholes Model

Zejia Duan ()
Additional contact information
Zejia Duan: Renmin University of China, School of Philosophy

A chapter in Proceedings of the 2025 5th International Conference on Enterprise Management and Economic Development (ICEMED 2025), 2025, pp 510-517 from Springer

Abstract: Abstract As sustainable development becomes a global consensus, green bonds have emerged as a critical instrument for financing environmentally beneficial projects. In addition to their environmental focus, the increasing adoption of embedded options—such as callable and puttable structures—has introduced new complexities into green bond pricing and investment analysis. This study aims to explore the theoretical pricing of embedded put options in green bonds using a modified Black-Scholes (BS) model and to derive investment implications based on model outputs. Taking “22 Tonglu 01,” a municipal green bond with a put option, as the empirical subject, the research calibrates model parameters from actual market data, including valuation prices, government bond yields, and index-based volatility. The embedded option is priced using a BS framework adapted for fixed-income features. Sensitivity analysis confirms that volatility significantly affects the option value, indicating the importance of accurate parameter estimation. The findings validate the feasibility of applying a calibrated BS model to green bond valuation and demonstrate that embedded options, even with limited magnitude, contribute meaningful risk management value. This approach offers theoretical guidance and methodological tools for pricing complex green bond structures in low-liquidity environments.

Keywords: Green bonds; Embedded options; Black-Scholes model; Volatility calibration; Sustainable finance (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-811-0_53

Ordering information: This item can be ordered from
http://www.springer.com/9789464638110

DOI: 10.2991/978-94-6463-811-0_53

Access Statistics for this chapter

More chapters in Advances in Economics, Business and Management Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().