The Pricing Of Callable/Putable Bonds Based On Hull-White Model

Embedded Interest Rate Option Bond is an important financial derivative.There are many types of this bond at home and abroad,such as callable bonds,putable bonds,convertible bonds,deferred bonds and so on.However,since the issue of the Embedded Interest Rate Option Bond in China,the domestic academic community has some research,but the empirical analysis is few.Thus,this paper makes an empirical analysis of pricing the callable/putable bonds.Although there are many pricing methods for callable/putable bonds,the domestic research is mainly analyzing the value of callable/putable bonds by the method of splitting the bonds into ordinary bonds and interest rate options.After they were separately priced and then summed up.The difference between the callable/putable bonds pricing methods is mainly focused on the pricing method of interest rate options.The pricing methods’ difference of interest rate options is mainly reflected in two aspects that are pricing model and numerical calculation method.The choice of pricing model is on the selection of interest rate term structure model.The interest rate term structure model for pricing bonds is mainly the arbitrage model,including Ho-Lee model,Hull-White single factor model,BDT model,BK model,Hull-White two-factor model.The numerical calculation methods mainly include tree structure method,Monte Carlo method,finite difference method,PDE method and so on.The combination of multiple pricing models and a variety of numerical methods lead to a number of methods for pricing the interest rate options,resulting in a number of methods for pricing the callable/putable bonds.However,these studies are based on the method of splitting the callable/putable bonds to analyze,the price made by this method is an approximate solution.There are some other methods to pricing the callable/putable bonds,including the OAS model method and the direct calculation method(Heyuan 2011[1]).Based on the Hull-White interest rate model,this paper analyzes the method of pricing the callable/putable bonds,and makes an empirical comparative analysis on the pricing methods of the split method,OAS model method and the direct calculation method.This paper examines eight sample bonds traded on the market,including four callable bonds,4 putable bonds.Screening bonds takes the bond type,credit rating,trading market,embedded option type and other factors into account.And each sample bond’s price is carried out by different pricing methods.The pricing results are compared with the market prices.The difference between the percentage and the running time is used to evaluate the pricing results.This paper deals with the selection of bond sample,parameter estimation,realization of pricing model program,result analysis and so on.Through the analysis of the pricing results of the sample bond on March 3,2017,the pricing result of direct calculation method is the most accurate,but the running time of the program is relatively long(within 4.1s).The OAS model method has a very short running time(0.02s or less),but the results of the pricing is seriously dependent on the OAS estimated value,OAS estimates of good or bad serious impact on the accuracy of this method;The result of the split method is not better than other two methods’ result.,but the bond is divided into ordinary bond value and option value,which is more intuitive.Overall,the direct calculation method’s result is better,although the program running time is relatively long,but also within 4.1s which is in an acceptable time range,and the pricing results are more accurate.And the method is very suitable for pricing the embedded American option bonds,which is satisfy the need of the development of the Embedded Interest Rate Option Bond market.