Question
You are required to assume that the only date on which the embedded option can be exercised is 28-Oct-2021 (i.e. ignore the 28-Jul-2022 date stated
You are required to assume that the only date on which the embedded option can be exercised is 28-Oct-2021 (i.e. ignore the 28-Jul-2022 date stated in the description). You should also assume that interest rate volatility is 25% and that interest rates follow a lognormal model, with an equal probability of an increase and decrease in rates each year. To make the valuation a little easier, you should assume that the valuation date is 28-Oct-2018 so that you do not have to consider accrued interest.
The relevant Euro-denominated benchmark par curve is as follows:
Maturity Years; 1, 2, 3, 4
Par Rate: -0.5%; -0.336%; -0.109%; +0.135
- Determine the price of this security (as a % of face value) assuming that OAS is equal to zero. Briefly explain why the price you have calculated will not precisely match the true theoretical price.
- Determine the OAS of the security given the current market price of the security is 101.50.
- Compute an appropriate measure of duration and convexity for this security. You should clearly state which measure you have selected and briefly explain why.
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