Puttable and Extendible Bonds : Developing Interest Rate Derivatives for Emerging Markets

Author/Editor:

Salih N. Neftci ; Andre O Santos

Publication Date:

October 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper analyzes the price stabilizing properties of puttable and extendible bonds, their potential to help develop interest-rate derivative markets, and their use by governments. Their stabilizing properties imply that, when bond prices fall, prices for puttable and extendible bonds fall by less. Their embedded options work as a cushion and replicate the trading gains from hedging long-term bonds with interest rate derivatives. These bonds can help develop interest-rate derivative markets in developing countries and eventually increase demand for long-term government bonds. Informal evidence from OECD countries suggests that these bonds were useful in the 1980s, when interest rates were volatile.

Series:

Working Paper No. 03/201

Subject:

English

Publication Date:

October 1, 2003

ISBN/ISSN:

9781451874372/1018-5941

Stock No:

WPIEA2003201

Format:

Paper

Pages:

30

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