| Summary: | 碩士 === 淡江大學 === 財務金融學系 === 90 === This article concentrates on the effectiveness of the Black, Derman, and Toy (1990; henceforth BDT) term structure model in pricing option embedded bonds. The BDT model has been popular among practitioners for its easy of calibration and straightforward solutions. By using two sets of inputs, the yield curve and the volatility curve, to create the short interest rate tree, we can use this model to pricing the interest rate sensitive claims. The volatility curve is estimated by CWMA and GARCH (1, 1) approach. Then, we use the BDT model to price option embedded bonds in Taiwan market. We also compare the model price with the actual value by using MSE and TIC approaches to measure the performance of the BDT model in pricing option embedded bonds.
Based on 868 estimated prices, the empirical results indicate that performance of BDT model in pricing option embedded bonds is well. Both of MSE and TIC value are within acceptable level. That means the estimated prices are closer to the actual price. And the BDT model with CWMA has a little better than the BDT model with GARCH(1,1). But the difference is very small. After all, for pricing the option embedded bond the BDT model is a good choice among all pricing models.
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