The Pricing Formula for Commodity-Linked Bonds with Stochastic Convenience Yields and Default Risk |
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Authors: | Ryozo Miura Hiroaki Yamauchi |
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Institution: | (1) Faculty of Commerce, Hitotsubashi University, Kunitachi, Tokyo, Japan;(2) Student in Doctoral program at Graduate School of Commerce, Hitotsubashi University, Kunitachi, Tokyo, Japan |
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Abstract: | At the maturity, the owner of a commodity-linked bond has the right to receive the face value of the bond and the excess amount
of spot market value of the reference commodity bundle over the prespecified exercise price. This payoff structure is an important
characteristic of the commodity-linked bonds. In this paper, we derive closed pricing formulae for the commodity-linked bonds.
We assume that the reference commodity price and the value of the firm (bonds' issuer) follow geometric Brownian motions and
that the net marginal convenience yield and interest rate follow Ornstein–Uhlenbech processes. In the appendix, we derive
pricing formulae for bonds which are the same as the above commodity-linked bonds, except that the reference commodity price
in the definition of the payoff at the maturity is replaced by the value of a special asset which depends on the convenience
yield.
This revised version was published online in August 2006 with corrections to the Cover Date. |
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Keywords: | bond pricing commodity-linked bond convenience yield default probability PDE |
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