The Science of Term Structure Models. P2.T5.40

[VishalM]

Question: In replicating a call option through a Long 1 year Bond and a short 6 months bond, how is Face value of Bonds calculated. The logic is that cost of replicating portfolio should be equal to value of the derivative, however the formula used in the spreadsheet (attached) is not clear.

Regards,

Vishal Mandokhot

 

[Nicole Seaman]

Question: In replicating a call option through a Long 1 year Bond and a short 6 months bond, how is Face value of Bonds calculated. The logic is that cost of replicating portfolio should be equal to value of the derivative, however the formula used in the spreadsheet (attached) is not clear.

Regards,

Vishal Mandokhot

Hello @VishalM

It looks like you are referencing one of our (paid) practice questions, although I don't see a current or past paid membership on your account anywhere. I've removed the (paid) spreadsheet that you attached in this post also, as they are not available to free members. There is a great deal of discussion and explanations regarding these practice questions in the original source thread for our paid members here: https://forum.bionicturtle.com/threads/l2-t5-40-replicating-callable-bond-tuckman.3551/#post-9531. In order to receive support for our materials, you need to purchase our materials from our website so you have paid permissions in the forum.

Thank you,

Nicole