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Call Features and Term to Maturity of Callable Foreign Bonds

Author

Listed:
  • Hooper, V.
  • Pointon, J.

Abstract

This paper models the value of "embedded" options in foreign bonds, using stochastic calculus, by assuming that the exchange rate follows a geometric Brownian motion process and the arrival time of an early redemption of the bond by the issuer conforms to a negative exponential distribution. The solution to the stochastic model shows that there is a relationship between the call premium and the expected time to the call.

Suggested Citation

  • Hooper, V. & Pointon, J., 1996. "Call Features and Term to Maturity of Callable Foreign Bonds," Papers 306, Australian National University - Department of Economics.
    • Handle: RePEc:fth:aunaec:306
    as

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    More about this item

    Keywords

    FINANCIAL MARKET; BONDS; INTERNATIONAL FINANCE;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other

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