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The Pricing Formula for Commodity-Linked Bonds with Stochastic Convenience Yields and Default Risk

  • Ryozo Miura
  • Hiroaki Yamauchi
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    At the maturity, the owner of a commodity-linked bond has the right to receive the face value of the bond and the excess amount of spot market value of the reference commodity bundle over the prespecified exercise price. This payoff structure is an important characteristic of the commodity-linked bonds. In this paper, we derive closed pricing formulae for the commodity-linked bonds. We assume that the reference commodity price and the value of the firm (bonds' issuer) follow geometric Brownian motions and that the net marginal convenience yield and interest rate follow Ornstein–Uhlenbech processes. In the appendix, we derive pricing formulae for bonds which are the same as the above commodity-linked bonds, except that the reference commodity price in the definition of the payoff at the maturity is replaced by the value of a special asset which depends on the convenience yield. Copyright Kluwer Academic Publishers 1998

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    File URL: http://hdl.handle.net/10.1023/A:1010034115552
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    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 5 (1998)
    Issue (Month): 2 (May)
    Pages: 129-158

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    Handle: RePEc:kap:apfinm:v:5:y:1998:i:2:p:129-158
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    1. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    2. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-76, July.
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