Embedded Options in Green Bonds and Designing Investment Strategies: A Study Based on the Black-Scholes Model

As sustainable development becomes a global consensus, green bonds have emerged as a critical instrument for financing environmentally beneficial projects. In addition to their environmental focus, the increasing adoption of embedded options—such as callable and puttable structures—has introduced new complexities into green bond pricing and investment analysis. This study aims to explore the theoretical pricing of embedded put options in green bonds using a modified Black-Scholes (BS) model and to derive investment implications based on model outputs. Taking “22 Tonglu 01,” a municipal green bond with a put option, as the empirical subject, the research calibrates model parameters from actual market data, including valuation prices, government bond yields, and index-based volatility. The embedded option is priced using a BS framework adapted for fixed-income features. Sensitivity analysis confirms that volatility significantly affects the option value, indicating the importance of accurate parameter estimation. The findings validate the feasibility of applying a calibrated BS model to green bond valuation and demonstrate that embedded options, even with limited magnitude, contribute meaningful risk management value. This approach offers theoretical guidance and methodological tools for pricing complex green bond structures in low-liquidity environments.