Title: Pricing of bond options in India

Authors: Sunrita Chaudhuri; Alok Pandey

Addresses: School of Management, GD Goenka University, Gurgaon, Haryana, India ' School of Management, GD Goenka University, Gurgaon, Haryana, India

Abstract: Bond options are widely used for managing interest rate risks. Bond options were introduced in India in December 2019. Various bond option pricing models are used by practitioners in the market. This study prices a European call option on 10-Year G-Sec using three models, the Jamshidian's option pricing formula based on Vasicek's model, the Black's option pricing model and Black, Derman and Toy's no arbitrage model. The results show that the option prices are different for different models. The study concludes that volatility of interest rates is an important consideration in each of the models and needs to be standardised to get comparable results.

Keywords: bond option pricing; Jamshidian's option pricing formula; Black's option pricing model; Black; Derman and Toy model.

DOI: 10.1504/IJFMD.2022.126011

International Journal of Financial Markets and Derivatives, 2022 Vol.8 No.4, pp.359 - 383

Received: 02 Feb 2022
Accepted: 14 May 2022
Published online: 06 Oct 2022 *

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