[Quantlib-users] Pricing Extension risk in AT1 Hybrids

[<ben...@ma...>]

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