Valuation of FID

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Valuation of FID

Bogaso
Hi,

I had placed this question in some other forums, however failed to
garner sufficient information till date. Presenting the same here
hoping to get some insightful ideas from experts here.

Typically in a Bond the Principal is constant over it's life. However
I have come across a Bond whose principal is variable, say, average of
S&P quote for the last one month and coupon is paid based on that,
coupon rate being constant. I was looking for some idea how such bond
can be priced?

Any idea will be highly appreciated.

Thanks and regards,

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Re: Valuation of FID

Eric Berger
Hi Christofer,
For this instrument its value today would be the sum of the present
value (pv) of its coupons and the pv of its redemption value.
You have not specified how the redemption value is determined, so I
won't deal with it. Regarding the coupons, you also did not say the
rate of the coupon, so let's say that is fixed, say at C (e.g. C=3%).
Each coupon appears to be C x (Avg Value of the Index), which seems to
be like holding C of an Average Rate Option (with a zero strike
price), also called an Average Price option (in this case an Average
Price Call). Since each coupon is a position in such an option, the
set of coupons is a portfolio of Average Price Calls. Hull and White
discuss valuation for such options, including a reference to Kemna and
Vorst (1990) who treated the case when the average is calculated as a
geometric average and the option is European.

Hopefully this provides enough clues for you to take it from here.

Best,
Eric

On Sun, Jun 21, 2020 at 10:47 PM Christofer Bogaso
<[hidden email]> wrote:

>
> Hi,
>
> I had placed this question in some other forums, however failed to
> garner sufficient information till date. Presenting the same here
> hoping to get some insightful ideas from experts here.
>
> Typically in a Bond the Principal is constant over it's life. However
> I have come across a Bond whose principal is variable, say, average of
> S&P quote for the last one month and coupon is paid based on that,
> coupon rate being constant. I was looking for some idea how such bond
> can be priced?
>
> Any idea will be highly appreciated.
>
> Thanks and regards,
>
> _______________________________________________
> [hidden email] mailing list
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> -- Subscriber-posting only. If you want to post, subscribe first.
> -- Also note that this is not the r-help list where general R questions should go.

_______________________________________________
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https://stat.ethz.ch/mailman/listinfo/r-sig-finance
-- Subscriber-posting only. If you want to post, subscribe first.
-- Also note that this is not the r-help list where general R questions should go.
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Re: Valuation of FID

braverock
This sounds more like a swap contract than a bond.  The principal is
some quantity of S&P (futures, index value* some initial capital,
something).
Perhaps look at pricing swaps.
On Sun, 2020-06-21 at 23:16 +0300, Eric Berger wrote:

> Hi Christofer,For this instrument its value today would be the sum of
> the presentvalue (pv) of its coupons and the pv of its redemption
> value.You have not specified how the redemption value is determined,
> so Iwon't deal with it. Regarding the coupons, you also did not say
> therate of the coupon, so let's say that is fixed, say at C (e.g.
> C=3%).Each coupon appears to be C x (Avg Value of the Index), which
> seems tobe like holding C of an Average Rate Option (with a zero
> strikeprice), also called an Average Price option (in this case an
> AveragePrice Call). Since each coupon is a position in such an
> option, theset of coupons is a portfolio of Average Price Calls. Hull
> and Whitediscuss valuation for such options, including a reference to
> Kemna andVorst (1990) who treated the case when the average is
> calculated as ageometric average and the option is European.
> Hopefully this provides enough clues for you to take it from here.
> Best,Eric
> On Sun, Jun 21, 2020 at 10:47 PM Christofer Bogaso<
> [hidden email]> wrote:
> > Hi,
> > I had placed this question in some other forums, however failed
> > togarner sufficient information till date. Presenting the same
> > herehoping to get some insightful ideas from experts here.
> > Typically in a Bond the Principal is constant over it's life.
> > HoweverI have come across a Bond whose principal is variable, say,
> > average ofS&P quote for the last one month and coupon is paid based
> > on that,coupon rate being constant. I was looking for some idea how
> > such bondcan be priced?
> > Any idea will be highly appreciated.
> > Thanks and regards,
> > _______________________________________________R-SIG-Finance@r-
> > project.org mailing list
> > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> > -- Subscriber-posting only. If you want to post, subscribe first.--
> > Also note that this is not the r-help list where general R
> > questions should go.
>
> _______________________________________________R-SIG-Finance@r-
> project.org mailing list
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> -- Subscriber-posting only. If you want to post, subscribe first.--
> Also note that this is not the r-help list where general R questions
> should go.
--
Brian



        [[alternative HTML version deleted]]

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Re: Valuation of FID

Eric Berger
Christofer provided only a sketch of the structure, but presumably it
is part of a general class of financial instruments called Structured
Notes.
There is a very short entry in Wikipedia that gives a bit of a flavor.
https://en.wikipedia.org/wiki/Structured_note

Structured notes would normally have a "buyer" who pays the
issuer/sponsor when the deal is entered.
By contrast, swaps generally have a value of zero at initiation. (Pre
the 'big bang' in the CDS market, this was true of CDS swaps also.)


On Mon, Jun 22, 2020 at 3:44 PM Brian G. Peterson <[hidden email]> wrote:

>
> This sounds more like a swap contract than a bond. The principal is some quantity of S&P (futures, index value* some initial capital, something).
>
> Perhaps look at pricing swaps.
>
> --
>
> Brian
>
> On Sun, 2020-06-21 at 23:16 +0300, Eric Berger wrote:
>
> Hi Christofer,
>
> For this instrument its value today would be the sum of the present
>
> value (pv) of its coupons and the pv of its redemption value.
>
> You have not specified how the redemption value is determined, so I
>
> won't deal with it. Regarding the coupons, you also did not say the
>
> rate of the coupon, so let's say that is fixed, say at C (e.g. C=3%).
>
> Each coupon appears to be C x (Avg Value of the Index), which seems to
>
> be like holding C of an Average Rate Option (with a zero strike
>
> price), also called an Average Price option (in this case an Average
>
> Price Call). Since each coupon is a position in such an option, the
>
> set of coupons is a portfolio of Average Price Calls. Hull and White
>
> discuss valuation for such options, including a reference to Kemna and
>
> Vorst (1990) who treated the case when the average is calculated as a
>
> geometric average and the option is European.
>
>
> Hopefully this provides enough clues for you to take it from here.
>
>
> Best,
>
> Eric
>
>
> On Sun, Jun 21, 2020 at 10:47 PM Christofer Bogaso
>
> <
>
> [hidden email]
>
> > wrote:
>
>
> Hi,
>
>
> I had placed this question in some other forums, however failed to
>
> garner sufficient information till date. Presenting the same here
>
> hoping to get some insightful ideas from experts here.
>
>
> Typically in a Bond the Principal is constant over it's life. However
>
> I have come across a Bond whose principal is variable, say, average of
>
> S&P quote for the last one month and coupon is paid based on that,
>
> coupon rate being constant. I was looking for some idea how such bond
>
> can be priced?
>
>
> Any idea will be highly appreciated.
>
>
> Thanks and regards,
>
>
> _______________________________________________
>
> [hidden email]
>
>  mailing list
>
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
>
>
> -- Subscriber-posting only. If you want to post, subscribe first.
>
> -- Also note that this is not the r-help list where general R questions should go.
>
>
> _______________________________________________
>
> [hidden email]
>
>  mailing list
>
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
>
>
> -- Subscriber-posting only. If you want to post, subscribe first.
>
> -- Also note that this is not the r-help list where general R questions should go.

_______________________________________________
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https://stat.ethz.ch/mailman/listinfo/r-sig-finance
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Re: Valuation of FID

braverock
Eric,

Agreed that this could be constructed as a structured note.

In that case there is an initial principal payment, which may be
leveraged.  Additionally, the principal may be 'principal-protected',
or not.

A structured note may be priced like a swap (if the note is not
principal protected), or it may be priced with a zero coupon bond and
embedded call option (for a principal protected note) or as a more
complex structure depending on the waterfall of payments to note
holders.  Especially in a leveraged and non-principal-protected
structure, the payoffs can be quite complex.

As you point out, the OP did not give us [m]any details about the
contract specification for what he is trying to price.  So I think we
need more specifics to add any more clarity to this thread.

--
Brian


On Mon, 2020-06-22 at 15:59 +0300, Eric Berger wrote:

> Christofer provided only a sketch of the structure, but presumably it
> is part of a general class of financial instruments called Structured
> Notes.
> There is a very short entry in Wikipedia that gives a bit of a
> flavor.
> https://en.wikipedia.org/wiki/Structured_note
>
>
> Structured notes would normally have a "buyer" who pays the
> issuer/sponsor when the deal is entered.
> By contrast, swaps generally have a value of zero at initiation. (Pre
> the 'big bang' in the CDS market, this was true of CDS swaps also.)
>
>
> On Mon, Jun 22, 2020 at 3:44 PM Brian G. Peterson <
> [hidden email]
> > wrote:
> > This sounds more like a swap contract than a bond. The principal is
> > some quantity of S&P (futures, index value* some initial capital,
> > something).
> >
> > Perhaps look at pricing swaps.
> >
> > --
> >
> > Brian
> >
> > On Sun, 2020-06-21 at 23:16 +0300, Eric Berger wrote:
> >
> > Hi Christofer,
> >
> > For this instrument its value today would be the sum of the present
> >
> > value (pv) of its coupons and the pv of its redemption value.
> >
> > You have not specified how the redemption value is determined, so I
> >
> > won't deal with it. Regarding the coupons, you also did not say the
> >
> > rate of the coupon, so let's say that is fixed, say at C (e.g.
> > C=3%).
> >
> > Each coupon appears to be C x (Avg Value of the Index), which seems
> > to
> >
> > be like holding C of an Average Rate Option (with a zero strike
> >
> > price), also called an Average Price option (in this case an
> > Average
> >
> > Price Call). Since each coupon is a position in such an option, the
> >
> > set of coupons is a portfolio of Average Price Calls. Hull and
> > White
> >
> > discuss valuation for such options, including a reference to Kemna
> > and
> >
> > Vorst (1990) who treated the case when the average is calculated as
> > a
> >
> > geometric average and the option is European.
> >
> >
> > Hopefully this provides enough clues for you to take it from here.
> >
> >
> > Best,
> >
> > Eric
> >
> >
> > On Sun, Jun 21, 2020 at 10:47 PM Christofer Bogaso
> >
> > <
> >
> > [hidden email]
> >
> >
> > > wrote:
> >
> >
> > Hi,
> >
> >
> > I had placed this question in some other forums, however failed to
> >
> > garner sufficient information till date. Presenting the same here
> >
> > hoping to get some insightful ideas from experts here.
> >
> >
> > Typically in a Bond the Principal is constant over it's life.
> > However
> >
> > I have come across a Bond whose principal is variable, say, average
> > of
> >
> > S&P quote for the last one month and coupon is paid based on that,
> >
> > coupon rate being constant. I was looking for some idea how such
> > bond
> >
> > can be priced?
> >
> >
> > Any idea will be highly appreciated.
> >
> >
> > Thanks and regards,
> >
> >
> > _______________________________________________
> >
> > [hidden email]
> >
> >
> >  mailing list
> >
> > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> >
> >
> >
> > -- Subscriber-posting only. If you want to post, subscribe first.
> >
> > -- Also note that this is not the r-help list where general R
> > questions should go.
> >
> >
> > _______________________________________________
> >
> > [hidden email]
> >
> >
> >  mailing list
> >
> > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> >
> >
> >
> > -- Subscriber-posting only. If you want to post, subscribe first.
> >
> > -- Also note that this is not the r-help list where general R
> > questions should go.
>
> _______________________________________________
> [hidden email]
>  mailing list
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
>
> -- Subscriber-posting only. If you want to post, subscribe first.
> -- Also note that this is not the r-help list where general R
> questions should go.

_______________________________________________
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Re: Valuation of FID

Bogaso
With the caveat that the exact nature of this instrument is a bit
proprietary, Eric's solution quite fit to this pricing problem.

I am curious to understand if there is any implementation in R (or
other software like python) to price such Average Price Calls option.

Thanks,

On Mon, Jun 22, 2020 at 7:30 PM Brian G. Peterson <[hidden email]> wrote:

>
> Eric,
>
> Agreed that this could be constructed as a structured note.
>
> In that case there is an initial principal payment, which may be
> leveraged.  Additionally, the principal may be 'principal-protected',
> or not.
>
> A structured note may be priced like a swap (if the note is not
> principal protected), or it may be priced with a zero coupon bond and
> embedded call option (for a principal protected note) or as a more
> complex structure depending on the waterfall of payments to note
> holders.  Especially in a leveraged and non-principal-protected
> structure, the payoffs can be quite complex.
>
> As you point out, the OP did not give us [m]any details about the
> contract specification for what he is trying to price.  So I think we
> need more specifics to add any more clarity to this thread.
>
> --
> Brian
>
>
> On Mon, 2020-06-22 at 15:59 +0300, Eric Berger wrote:
> > Christofer provided only a sketch of the structure, but presumably it
> > is part of a general class of financial instruments called Structured
> > Notes.
> > There is a very short entry in Wikipedia that gives a bit of a
> > flavor.
> > https://en.wikipedia.org/wiki/Structured_note
> >
> >
> > Structured notes would normally have a "buyer" who pays the
> > issuer/sponsor when the deal is entered.
> > By contrast, swaps generally have a value of zero at initiation. (Pre
> > the 'big bang' in the CDS market, this was true of CDS swaps also.)
> >
> >
> > On Mon, Jun 22, 2020 at 3:44 PM Brian G. Peterson <
> > [hidden email]
> > > wrote:
> > > This sounds more like a swap contract than a bond. The principal is
> > > some quantity of S&P (futures, index value* some initial capital,
> > > something).
> > >
> > > Perhaps look at pricing swaps.
> > >
> > > --
> > >
> > > Brian
> > >
> > > On Sun, 2020-06-21 at 23:16 +0300, Eric Berger wrote:
> > >
> > > Hi Christofer,
> > >
> > > For this instrument its value today would be the sum of the present
> > >
> > > value (pv) of its coupons and the pv of its redemption value.
> > >
> > > You have not specified how the redemption value is determined, so I
> > >
> > > won't deal with it. Regarding the coupons, you also did not say the
> > >
> > > rate of the coupon, so let's say that is fixed, say at C (e.g.
> > > C=3%).
> > >
> > > Each coupon appears to be C x (Avg Value of the Index), which seems
> > > to
> > >
> > > be like holding C of an Average Rate Option (with a zero strike
> > >
> > > price), also called an Average Price option (in this case an
> > > Average
> > >
> > > Price Call). Since each coupon is a position in such an option, the
> > >
> > > set of coupons is a portfolio of Average Price Calls. Hull and
> > > White
> > >
> > > discuss valuation for such options, including a reference to Kemna
> > > and
> > >
> > > Vorst (1990) who treated the case when the average is calculated as
> > > a
> > >
> > > geometric average and the option is European.
> > >
> > >
> > > Hopefully this provides enough clues for you to take it from here.
> > >
> > >
> > > Best,
> > >
> > > Eric
> > >
> > >
> > > On Sun, Jun 21, 2020 at 10:47 PM Christofer Bogaso
> > >
> > > <
> > >
> > > [hidden email]
> > >
> > >
> > > > wrote:
> > >
> > >
> > > Hi,
> > >
> > >
> > > I had placed this question in some other forums, however failed to
> > >
> > > garner sufficient information till date. Presenting the same here
> > >
> > > hoping to get some insightful ideas from experts here.
> > >
> > >
> > > Typically in a Bond the Principal is constant over it's life.
> > > However
> > >
> > > I have come across a Bond whose principal is variable, say, average
> > > of
> > >
> > > S&P quote for the last one month and coupon is paid based on that,
> > >
> > > coupon rate being constant. I was looking for some idea how such
> > > bond
> > >
> > > can be priced?
> > >
> > >
> > > Any idea will be highly appreciated.
> > >
> > >
> > > Thanks and regards,
> > >
> > >
> > > _______________________________________________
> > >
> > > [hidden email]
> > >
> > >
> > >  mailing list
> > >
> > > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> > >
> > >
> > >
> > > -- Subscriber-posting only. If you want to post, subscribe first.
> > >
> > > -- Also note that this is not the r-help list where general R
> > > questions should go.
> > >
> > >
> > > _______________________________________________
> > >
> > > [hidden email]
> > >
> > >
> > >  mailing list
> > >
> > > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> > >
> > >
> > >
> > > -- Subscriber-posting only. If you want to post, subscribe first.
> > >
> > > -- Also note that this is not the r-help list where general R
> > > questions should go.
> >
> > _______________________________________________
> > [hidden email]
> >  mailing list
> > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> >
> > -- Subscriber-posting only. If you want to post, subscribe first.
> > -- Also note that this is not the r-help list where general R
> > questions should go.
>
> _______________________________________________
> [hidden email] mailing list
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> -- Subscriber-posting only. If you want to post, subscribe first.
> -- Also note that this is not the r-help list where general R questions should go.

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Re: Valuation of FID

Eric Berger
Hi Christofer,
There is a tremendous amount of functionality in the C++ library QuantLib.
Some of that functionality can be easily accessed from R via the
package RQuantLib (developed by Dirk Eddelbuettel.)
I suggest you check QuantLib to see if they have pricing models for
Average Price Calls.
If so, then see if you can access those functions from RQuantLib. (If
not, you might need to access QuantLib with the help of Rcpp.)

Hope that helps,
Eric

On Tue, Jun 23, 2020 at 4:12 PM Christofer Bogaso
<[hidden email]> wrote:

>
> With the caveat that the exact nature of this instrument is a bit
> proprietary, Eric's solution quite fit to this pricing problem.
>
> I am curious to understand if there is any implementation in R (or
> other software like python) to price such Average Price Calls option.
>
> Thanks,
>
> On Mon, Jun 22, 2020 at 7:30 PM Brian G. Peterson <[hidden email]> wrote:
> >
> > Eric,
> >
> > Agreed that this could be constructed as a structured note.
> >
> > In that case there is an initial principal payment, which may be
> > leveraged.  Additionally, the principal may be 'principal-protected',
> > or not.
> >
> > A structured note may be priced like a swap (if the note is not
> > principal protected), or it may be priced with a zero coupon bond and
> > embedded call option (for a principal protected note) or as a more
> > complex structure depending on the waterfall of payments to note
> > holders.  Especially in a leveraged and non-principal-protected
> > structure, the payoffs can be quite complex.
> >
> > As you point out, the OP did not give us [m]any details about the
> > contract specification for what he is trying to price.  So I think we
> > need more specifics to add any more clarity to this thread.
> >
> > --
> > Brian
> >
> >
> > On Mon, 2020-06-22 at 15:59 +0300, Eric Berger wrote:
> > > Christofer provided only a sketch of the structure, but presumably it
> > > is part of a general class of financial instruments called Structured
> > > Notes.
> > > There is a very short entry in Wikipedia that gives a bit of a
> > > flavor.
> > > https://en.wikipedia.org/wiki/Structured_note
> > >
> > >
> > > Structured notes would normally have a "buyer" who pays the
> > > issuer/sponsor when the deal is entered.
> > > By contrast, swaps generally have a value of zero at initiation. (Pre
> > > the 'big bang' in the CDS market, this was true of CDS swaps also.)
> > >
> > >
> > > On Mon, Jun 22, 2020 at 3:44 PM Brian G. Peterson <
> > > [hidden email]
> > > > wrote:
> > > > This sounds more like a swap contract than a bond. The principal is
> > > > some quantity of S&P (futures, index value* some initial capital,
> > > > something).
> > > >
> > > > Perhaps look at pricing swaps.
> > > >
> > > > --
> > > >
> > > > Brian
> > > >
> > > > On Sun, 2020-06-21 at 23:16 +0300, Eric Berger wrote:
> > > >
> > > > Hi Christofer,
> > > >
> > > > For this instrument its value today would be the sum of the present
> > > >
> > > > value (pv) of its coupons and the pv of its redemption value.
> > > >
> > > > You have not specified how the redemption value is determined, so I
> > > >
> > > > won't deal with it. Regarding the coupons, you also did not say the
> > > >
> > > > rate of the coupon, so let's say that is fixed, say at C (e.g.
> > > > C=3%).
> > > >
> > > > Each coupon appears to be C x (Avg Value of the Index), which seems
> > > > to
> > > >
> > > > be like holding C of an Average Rate Option (with a zero strike
> > > >
> > > > price), also called an Average Price option (in this case an
> > > > Average
> > > >
> > > > Price Call). Since each coupon is a position in such an option, the
> > > >
> > > > set of coupons is a portfolio of Average Price Calls. Hull and
> > > > White
> > > >
> > > > discuss valuation for such options, including a reference to Kemna
> > > > and
> > > >
> > > > Vorst (1990) who treated the case when the average is calculated as
> > > > a
> > > >
> > > > geometric average and the option is European.
> > > >
> > > >
> > > > Hopefully this provides enough clues for you to take it from here.
> > > >
> > > >
> > > > Best,
> > > >
> > > > Eric
> > > >
> > > >
> > > > On Sun, Jun 21, 2020 at 10:47 PM Christofer Bogaso
> > > >
> > > > <
> > > >
> > > > [hidden email]
> > > >
> > > >
> > > > > wrote:
> > > >
> > > >
> > > > Hi,
> > > >
> > > >
> > > > I had placed this question in some other forums, however failed to
> > > >
> > > > garner sufficient information till date. Presenting the same here
> > > >
> > > > hoping to get some insightful ideas from experts here.
> > > >
> > > >
> > > > Typically in a Bond the Principal is constant over it's life.
> > > > However
> > > >
> > > > I have come across a Bond whose principal is variable, say, average
> > > > of
> > > >
> > > > S&P quote for the last one month and coupon is paid based on that,
> > > >
> > > > coupon rate being constant. I was looking for some idea how such
> > > > bond
> > > >
> > > > can be priced?
> > > >
> > > >
> > > > Any idea will be highly appreciated.
> > > >
> > > >
> > > > Thanks and regards,
> > > >
> > > >
> > > > _______________________________________________
> > > >
> > > > [hidden email]
> > > >
> > > >
> > > >  mailing list
> > > >
> > > > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> > > >
> > > >
> > > >
> > > > -- Subscriber-posting only. If you want to post, subscribe first.
> > > >
> > > > -- Also note that this is not the r-help list where general R
> > > > questions should go.
> > > >
> > > >
> > > > _______________________________________________
> > > >
> > > > [hidden email]
> > > >
> > > >
> > > >  mailing list
> > > >
> > > > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> > > >
> > > >
> > > >
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> > >
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Re: Valuation of FID

Enrico Schumann-2
In reply to this post by Bogaso
On Tue, 23 Jun 2020, Christofer Bogaso writes:

> With the caveat that the exact nature of this instrument is a bit
> proprietary, Eric's solution quite fit to this pricing problem.
>
> I am curious to understand if there is any implementation in R (or
> other software like python) to price such Average Price Calls option.
>
> Thanks,

Other than RQuantLib, mentioned by Eric, you may want to
search for "Asian options".  I am sure there are several
implementations available in R, e.g. in packages
"fExoticOptions" and "derivmkts".  But please do check if
they really provide what you need.

kind regards
    Enrico

> On Mon, Jun 22, 2020 at 7:30 PM Brian G. Peterson <[hidden email]> wrote:
>>
>> Eric,
>>
>> Agreed that this could be constructed as a structured note.
>>
>> In that case there is an initial principal payment, which may be
>> leveraged.  Additionally, the principal may be 'principal-protected',
>> or not.
>>
>> A structured note may be priced like a swap (if the note is not
>> principal protected), or it may be priced with a zero coupon bond and
>> embedded call option (for a principal protected note) or as a more
>> complex structure depending on the waterfall of payments to note
>> holders.  Especially in a leveraged and non-principal-protected
>> structure, the payoffs can be quite complex.
>>
>> As you point out, the OP did not give us [m]any details about the
>> contract specification for what he is trying to price.  So I think we
>> need more specifics to add any more clarity to this thread.
>>
>> --
>> Brian
>>
>>
>> On Mon, 2020-06-22 at 15:59 +0300, Eric Berger wrote:
>> > Christofer provided only a sketch of the structure, but presumably it
>> > is part of a general class of financial instruments called Structured
>> > Notes.
>> > There is a very short entry in Wikipedia that gives a bit of a
>> > flavor.
>> > https://en.wikipedia.org/wiki/Structured_note
>> >
>> >
>> > Structured notes would normally have a "buyer" who pays the
>> > issuer/sponsor when the deal is entered.
>> > By contrast, swaps generally have a value of zero at initiation. (Pre
>> > the 'big bang' in the CDS market, this was true of CDS swaps also.)
>> >
>> >
>> > On Mon, Jun 22, 2020 at 3:44 PM Brian G. Peterson <
>> > [hidden email]
>> > > wrote:
>> > > This sounds more like a swap contract than a bond. The principal is
>> > > some quantity of S&P (futures, index value* some initial capital,
>> > > something).
>> > >
>> > > Perhaps look at pricing swaps.
>> > >
>> > > --
>> > >
>> > > Brian
>> > >
>> > > On Sun, 2020-06-21 at 23:16 +0300, Eric Berger wrote:
>> > >
>> > > Hi Christofer,
>> > >
>> > > For this instrument its value today would be the sum of the present
>> > >
>> > > value (pv) of its coupons and the pv of its redemption value.
>> > >
>> > > You have not specified how the redemption value is determined, so I
>> > >
>> > > won't deal with it. Regarding the coupons, you also did not say the
>> > >
>> > > rate of the coupon, so let's say that is fixed, say at C (e.g.
>> > > C=3%).
>> > >
>> > > Each coupon appears to be C x (Avg Value of the Index), which seems
>> > > to
>> > >
>> > > be like holding C of an Average Rate Option (with a zero strike
>> > >
>> > > price), also called an Average Price option (in this case an
>> > > Average
>> > >
>> > > Price Call). Since each coupon is a position in such an option, the
>> > >
>> > > set of coupons is a portfolio of Average Price Calls. Hull and
>> > > White
>> > >
>> > > discuss valuation for such options, including a reference to Kemna
>> > > and
>> > >
>> > > Vorst (1990) who treated the case when the average is calculated as
>> > > a
>> > >
>> > > geometric average and the option is European.
>> > >
>> > >
>> > > Hopefully this provides enough clues for you to take it from here.
>> > >
>> > >
>> > > Best,
>> > >
>> > > Eric
>> > >
>> > >
>> > > On Sun, Jun 21, 2020 at 10:47 PM Christofer Bogaso
>> > >
>> > > <
>> > >
>> > > [hidden email]
>> > >
>> > >
>> > > > wrote:
>> > >
>> > >
>> > > Hi,
>> > >
>> > >
>> > > I had placed this question in some other forums, however failed to
>> > >
>> > > garner sufficient information till date. Presenting the same here
>> > >
>> > > hoping to get some insightful ideas from experts here.
>> > >
>> > >
>> > > Typically in a Bond the Principal is constant over it's life.
>> > > However
>> > >
>> > > I have come across a Bond whose principal is variable, say, average
>> > > of
>> > >
>> > > S&P quote for the last one month and coupon is paid based on that,
>> > >
>> > > coupon rate being constant. I was looking for some idea how such
>> > > bond
>> > >
>> > > can be priced?
>> > >
>> > >
>> > > Any idea will be highly appreciated.
>> > >
>> > >
>> > > Thanks and regards,
>> > >
>> > >
>> > > _______________________________________________
>> > >
>> > > [hidden email]
>> > >
>> > >
>> > >  mailing list
>> > >
>> > > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
>> > >
>> > >
>> > >
>> > > -- Subscriber-posting only. If you want to post, subscribe first.
>> > >
>> > > -- Also note that this is not the r-help list where general R
>> > > questions should go.
>> > >
>> > >
>> > > _______________________________________________
>> > >
>> > > [hidden email]
>> > >
>> > >
>> > >  mailing list
>> > >
>> > > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
>> > >
>> > >
>> > >
>> > > -- Subscriber-posting only. If you want to post, subscribe first.
>> > >
>> > > -- Also note that this is not the r-help list where general R
>> > > questions should go.
>> >
>> > _______________________________________________
>> > [hidden email]
>> >  mailing list
>> > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
>> >
>> > -- Subscriber-posting only. If you want to post, subscribe first.
>> > -- Also note that this is not the r-help list where general R
>> > questions should go.
>>
>> _______________________________________________
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>
> _______________________________________________
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--
Enrico Schumann
Lucerne, Switzerland
http://enricoschumann.net

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