Pricing commodity bonds using binomial option pricing

Raghuram Rajan

No 136, Policy Research Working Paper Series from The World Bank

Abstract: Commodity linked bonds have received considerable attention recently as a way to tailor a developing country's debt repayments to its ability to pay. This report presents a method for pricing commodity-linked bonds in the presence of default risk and a commodity price risk. The advantage of this method is that extensions are very simple. Following an introduction, in part 2 of the report a simple version of the bond is priced to make the process transparent. In part 3, the parameters of the model are derived from real world values. In part 4 the model is extended to incorporate the various features that these bonds can include. Part 5 contains come comparisons of the values obtained by the model with those obtained by the Schwartz model.

Keywords: Banks&Banking Reform; Economic Theory&Research; Markets and Market Access; Access to Markets; Health Economics&Finance (search for similar items in EconPapers)
Date: 1988-12-31
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