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caperover
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Joined: June 25th, 2005, 4:54 pm

Zvspread for a callable bond

April 5th, 2019, 1:53 pm

When calculating zvspread for a callable bond, should we use schedueld cash flows of the underlying bond or project cash flows based on estimated option exercise according to the zero volatility curve? In theory, option cost should 0 when the volatility is 0. Thanks.
 
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bearish
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Joined: February 3rd, 2011, 2:19 pm

Re: Zvspread for a callable bond

April 5th, 2019, 4:12 pm

You should base it on the zv option exercise. There can be lots of intrinsic value to an option. Only the time value is eliminated when you turn off volatility.
 
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caperover
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Joined: June 25th, 2005, 4:54 pm

Re: Zvspread for a callable bond

April 5th, 2019, 6:42 pm

You should base it on the zv option exercise. There can be lots of intrinsic value to an option. Only the time value is eliminated when you turn off volatility.
Good point! Thanks