This paper models the value of callable Eurobonds, using stochastic calculus,\nby assuming that the exchange rate follows a geometric Brownian motion\nprocess and the arrival time of an early redemption of the bond by the issuer\nconforms to a negative exponential distribution. The solution to the stochastic\nmodel shows that there is a relationship between the call premium and the\nexpected time to the call which is consistent with traditional Black-Scholes\npricing formulae. The magnitude of the call premium can be viewed as a signal\nto the market on a Government treasuryâ??s or companyâ??s expectations\nabout the future level of interest rates and possible refinancing strategies. This\npaper is unique because as of July 2019 there exists no attempt at valuing\nCallable Eurobonds in the research literature.
Loading....