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Valuing Bonds with Embedded Average Price Options

Author

Listed:
  • Stephen A. Easton

    (Associate Professor, Department of Accounting and Finance, Monash University, Clayton Victoria 3168.)

Abstract

Average price options are based on the average (either arithmetic or geometric) price of the underlying asset during an option's life. Recently, Australia's largest private bank, the National Australia Bank, and the regional Metway Bank, have issued bonds that contain embedded arithmetic average share index options. The purpose of this paper is to value these options using Monte Carlo simulation, and then to value the bonds themselves. Using a wide range of estimates of the parameters that determine the values of these bonds, it would appear that the fixed-term deposits offered by these same banks represent more profitable investments.

Suggested Citation

  • Stephen A. Easton, 1996. "Valuing Bonds with Embedded Average Price Options," Australian Journal of Management, Australian School of Business, vol. 21(1), pages 29-40, June.
    • Handle: RePEc:sae:ausman:v:21:y:1996:i:1:p:29-40
    DOI: 10.1177/031289629602100105
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    References listed on IDEAS

    as
    1. Kemna, A. G. Z. & Vorst, A. C. F., 1990. "A pricing method for options based on average asset values," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 113-129, March.
    2. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(3), pages 377-389, September.
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