Can someone explain how Yield volatility affects value of these options? Call bond Put bond Call option Put option ?? I thot increase in yield volatitily increase the values of call and puts… but… wtf…
yield volatility increase the value of the call option and the put option. in terms of the price of the bond…a callable bond price will go down because a call option is a negative for the bondholder. The issuer has the option to call the bond back. a putable bond price will go up because it is a positive for the bondholder. The bondholder has the option of putting the bond back.
LongOnCFA, your description of yield volatility is of an increase or a decrease of yield? I think yield volatility affects the bond and option value depending on which direction of volatility. (due to the negative convexity characteristics of the option-embedded bonds). Correct me if I’m wrong.
my description is when yield volatility increases. Basically option values (both call and put) are positively correlated with yield volatility. Sondin, yes, if you are told yields are going down, a call option will have more value than a put and vice versa. But if you are just saying that yield VOLATILITY has increased, means the yield will jump up AND down more, making both options worth more.