wilmott.com

Hi,Would someone know about how do we go about using Black Scholes for pricing Bond Options on yield as strike. I see this has been implemented by a few standard option calculators.

Is there a particular reason for treating bond options as yield options? What those calculators might be doing is converting the inputs into equivalent forward price space and applying the Black model on price after all.To price a swaption one multiplies the value of a pure yield option by an annuity present value factor. For most swaptions (at least vanilla ones) the underlying swap does not start until option expiry. In the case of a bond option, however, the underlying accrues interest through the option period. You would have to get your head around that wrinkle.

Thanks..but bloomberg seems to have Black's as an option as well..and the strike needs to specified as price..