In financea bond option is an option to buy or sell a bond at a certain price on or before the option expiry date. Generally, one buys a call option on the bond if one believes that interest rates will fall, causing an increase in bond prices.

Likewise, one buys the put option if one believes that the opposite will be the case. Bondsthe underlyers in this case, exhibit what is known as pull-to-par: On the other hand, the Black—Scholes model, which assumes constant volatility, does not reflect this processand cannot therefore be applied here; [1] see Black—Scholes model Valuing bond options. Addressing this, bond options are usually valued using the Black model or with a lattice-based short rate model such as Black-Derman-ToyHo-Lee or Hull—White.

For American- and Bermudan- styled optionswhere exercise is permitted prior to maturity, only the lattice-based approach is applicable. The term "bond option" is also used for option-like features of some bonds " embedded options ". These are an inherent part of the bond, rather than a separately traded product.

These options are not mutually exclusive, so a bond may have several options embedded. Here, the bond is priced as a "straight bond" i. The option value is then added to the straight bond price if the optionality rests with the buyer of the bond; it is subtracted if the seller of the bond i. European Put options on zero coupon bonds can be seen to be equivalent to suitable caplets, i.

See for example Brigo and Mercuriowho also discuss bond options valuation with different models.

Bond option - Wikipedia

From Wikipedia, the free encyclopedia. Bank A Underlying asset: FNMA Bond Spot Price: Bank A pays a premium to Bank B which is the premium percentage multiplied by the face value of the bonds. At the maturity of the option, Bank A either exercises the option and buys the bonds from Bank B at the predetermined strike price, or chooses not to exercise the option.

In either case, Bank A has lost the premium to Bank B. A European bond option is an option to buy or sell a bond at a certain date in future for a predetermined price.

An American bond option is an option to buy or sell a bond on or before a certain date in future for a predetermined price. Bond Debenture Fixed income.

Convertible bond - Wikipedia

Agency bond Corporate bond Senior debt Subordinated debt Distressed debt Emerging market debt Government bond Municipal bond. Accrual bond Auction rate security Callable bond Commercial paper Contingent convertible bond Convertible bond Call option convertible bond bond Extendible bond Fixed smith barney stock options login bond Floating rate note High-yield debt Inflation-indexed bond Inverse floating rate note Pearsall livestock market report bond Puttable bond Reverse convertible securities Zero-coupon bond.

Clean price Convexity Stock market scholarship Credit spread Current yield Dirty price Duration I-spread Mortgage yield Nominal yield Option-adjusted spread Risk-free bond Weighted-average life Yield curve Yield spread Yield to maturity Z-spread. Asset-backed security Collateralized debt obligation Collateralized mortgage obligation Commercial mortgage-backed security Mortgage-backed security.

Callable bond Convertible bond Embedded option Exchangeable bond Extendible bond Puttable bond. Commercial Mortgage Securities Association CMSA International Capital Market Association ICMA Securities Industry and Financial Markets Association SIFMA. Credit gteam work from home Debit spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility.

Bond option Call Employee stock option Fixed income FX Option styles Put Warrants. Asian Barrier Basket Binary Chooser Cliquet Commodore Compound Forward start Interest rate Lookback Mountain range Rainbow Swaption. Collar Call option convertible bond call Fence Iron butterfly Iron condor Straddle Strangle Protective put Risk reversal.

Back Bear Box Bull Butterfly Calendar Diagonal Intermarket Ratio Vertical. Binomial Black Black—Scholes model Finite difference Forex tax treatment uk Margrabe's formula Put—call parity Simulation Real options valuation Trinomial Vanna—Volga pricing.

Amortising Asset Basis Conditional variance Constant maturity Correlation Credit default Currency Dividend Equity Forex Inflation Interest rate Overnight indexed Total return Variance Volatility Year-on-Year Inflation-Indexed Zero-Coupon Inflation-Indexed. Contango Currency future Dividend future Forward market Forward price Forwards pricing Forward rate Futures pricing Interest rate future Margin Normal backwardation Single-stock futures Slippage Stock market index future.

Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Collateralized debt obligation CDO Constant proportion portfolio insurance Contract for difference Credit-linked note CLN Credit default option Credit derivative Equity-linked note ELN Equity derivative Foreign exchange derivative Fund derivative Interest rate derivative Mortgage-backed security Power reverse dual-currency note PRDC.

Consumer debt Corporate debt Government debt Great Recession Municipal debt Tax policy. Retrieved from " https: Bonds finance Options finance. All articles with dead external links Articles with dead external links from November Articles with permanently dead external links. Navigation menu Personal tools Not logged in Talk Contributions Create account Log in. Views Read Edit View history.

Navigation Main page Contents Featured content Current events Random article Donate to Wikipedia Wikipedia store. Interaction Help About Wikipedia Community portal Recent changes Contact page. Tools What links here Related changes Upload file Special pages Permanent link Page information Wikidata item Cite this page. Languages Deutsch Edit links.

This page was last edited on 10 Mayat Text is available under the Creative Commons Attribution-ShareAlike License ; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Cookie statement Mobile view. On the Trade Date, Bank A enters into an option with Bank B to buy certain FNMA Bonds from Bank B for the Strike Price mentioned.

Terms Credit spread Debit spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility.