Dear Dr. JoeyD, consider the following (callable or putable) bond: maturity 10 Years interest rate LIBOR+10BP If the knockinlevel is burst the interest rate doubles This knockinoption creates higher interest risk. --> Pepps statement about embeddeds is not right in a general way.
cfaisok Wrote: ------------------------------------------------------- > Dear Dr. JoeyD, > > consider the following (callable or putable) > bond: > > maturity 10 Years > interest rate LIBOR+10BP > If the knockinlevel is burst the interest rate > doubles > > This knockinoption creates higher interest risk. > --> > Pepps statement about embeddeds is not right in a > general way. cfaisok, in this case we need to pay attention at which level the knockin level is fixed and the volatility of the underlying… those two are very important factors
True. But not too relevant for Joey and me.
Joey, just saw you on the board. Please give a statement…
cfaisok Wrote: ------------------------------------------------------- > Dear Dr. JoeyD, > > consider the following (callable or putable) > bond: > > maturity 10 Years > interest rate LIBOR+10BP > If the knockinlevel is burst the interest rate > doubles > > This knockinoption creates higher interest risk. > --> > Pepps statement about embeddeds is not right in a > general way. Ok, ok. It’s true that there all kinds of junkie derivatives attached to “bonds”. For the sake of the CFA exam, assume that a) all embedded bond options are about exchanging the bond. b) the interest rate on the bond is independent of the option and is either fixed or fixed spread + floating rate index BTW - I’m sure that somewhere someone has fairly priced one of these bonds with exotic options attached. I’ve just never seen one in the ballpark of fairly priced.
maturity up = duration up others up = duration down
thats the second time you admit that i am right… “BTW - I’m sure that somewhere someone has fairly priced one of these bonds with exotic options attached.” I do everyday price exotics Most of the time using MC-Sim if it’s too complicated… Next time you provide a beer, ok?
Question 1 is A b/c more vol = higher chance of it getting called, that is NOT GOOD from an investors vantage point