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From: <ben...@ma...> - 2020-12-11 02:19:11
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I am looking at pricing the extension risk of AT1 bank issued bonds. These are tier 1 bonds that have extension features. These are a bit complex as it boils down to a ‘put’ in to a forward start callable bond. We break up the bond into a * non-callable bond (Quantlib is fine here…. tick!) * puttable ‘callable’ bond * The puttable part has non-economic trigger – i.e. the issuer will ‘put’ the bond, not based on if the forward bond is in the money or not, but based on other considerations such as Tier 1 capital considerations of the bank and the market for refinance. * The callable bond is a bond that settles at the ‘first call date’ and in many instances is perpetual. Coupons are resettable and can be fixed or floating. There is usually a call schedule that typically is based on the coupon dates. Generally these bonds would ultimately be called when the bank or market conditions improve. The puttable part I think will be OK as I an imply the option premium by the difference in the non-call price and the market price of the bond. If I can work out the price of the callable bond, I can then infer back the put option delta (i.e. probability of extending). Looking at the callable bond part – I see that Quantlib can not do callable floaters. This is OK for now, but this will need to be addressed at some point (floaters would dampen the price volatility). But my question is this -what I will need is the CR01 of the extendable bond. In the case I am looking at, the bond has a legal maturity of 2168 and clearly the risk is not all to this date. So to calculate the CR01, I would need to look at the value (and imply a delta) at each lattice node. Is it possible to get details of the lattice? Any help here would be helpful. Happy to entertain other ideas on pricing these. Regards Ben |