Engine Bermudan Callable Bonds

Hi,

Is there an easy way to represent a bermudan style callable bond in ORE v.10? A callable swap is possible as a deal with a non-call swap and a swaption with bermudan style. Also a vanilla bond is possible and an european bond option, but I can't straight away find a combo that captures the bermudan embedded option.

Regards, Laurentiu.

Jul 05 '23 07:07 noonediesalone

Hi Laurentiu,

there is no direct way at the moment. Callable / Puttable Bonds are under development and will most probably added in one of the next releases. This will include American-style calls.

In some contexts callable bonds are modelled as a vanilla bond + interest rate swaption exercising into an asset swap for the bond. This is of course already possible.

Best Peter

Jul 18 '23 19:07 pcaspers

Hi Peter,

Thank you for your comments. I've raised this issue with hopes this will get added with one of the next releases, so glad to hear you're confirming this 😄 I think will let this issue open for a little while longer. Having the embedded option as a swaption for an asset swap is a plausible way to go. Maybe a drawback is that swap and bond will not be discounted by the same thing (e.g. asset swap can carry collateral, while bond needs some benchmark yield to discount).

Regards, Laurentiu,

Jul 19 '23 07:07 noonediesalone

Absolutely, it's not the same thing! The spread on the asset swap's funding leg takes the role of the discounting spread but it's clearly not equivalent and can give very different answers.

Jul 19 '23 18:07 pcaspers