GDP-Linked Bonds: Contract Design and Pricing

Ser-Huang Poon, Oleg Ruban, Luiz Vitiello

Research output: Working paper

Abstract

GDP linked bonds have their cashflows linked to a country???s nationaloutput. We present a model of sovereign default that tracks the sovereign???scapacity to pay through the real exchange rate and potential output. Bycalibrating to a vanilla bond, our model produces default profiles and pricesfor GDP linked bonds. We evaluate the model???s empirical performance bypricing Argentina???s GDP warrants. We then examine the effect on the costof borrowing and default probability of several indexation schemes and showhow our model can identify indexation schemes best suited to countries indifferent economic circumstances.
Original languageEnglish
Place of PublicationUnited Kongdom
Number of pages59
Publication statusPublished - 2008

Publication series

NameManchester Business School Working Paper Series
PublisherManchester Business School

Keywords

  • Emerging market soverign debt, structural approach, incomplete

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