# bkcall

Price European call option on bonds using Black model

## Syntax

## Description

adds optional input arguments for `CallPrice`

= bkcall(___,`Period`

,`Basis`

,`EndMonthRule`

,`InterpMethod`

,`StrikeConvention`

)`Period`

, `Basis`

,
`EndMonthRule`

, `InterpMethod`

, and
`StrikeConvention`

.

## Examples

### Price a European Call Option On Bonds Using the Black Model

This example shows how to price a European call option on bonds using the Black model. Consider a European call option on a bond maturing in 9.75 years. The underlying bond has a clean price of $935, a face value of $1000, and pays 10% semiannual coupons. Since the bond matures in 9.75 years, a $50 coupon will be paid in 3 months and again in 9 months. Also, assume that the annualized volatility of the forward bond price is 9%. Furthermore, suppose the option expires in 10 months and has a strike price of $1000, and that the annualized continuously compounded risk-free discount rates for maturities of 3, 9, and 10 months are 9%, 9.5%, and 10%, respectively.

% specify the option information Settle = '15-Mar-2004'; Expiry = '15-Jan-2005'; % 10 months from settlement Strike = 1000; Sigma = 0.09; Convention = [0 1]'; % specify the interest-rate environment ZeroData = [datenum('15-Jun-2004') 0.09 -1; % 3 months datenum('15-Dec-2004') 0.095 -1; % 9 months datenum(Expiry) 0.10 -1]; % 10 months % specify the bond information CleanPrice = 935; CouponRate = 0.1; Maturity = '15-Dec-2013'; % 9.75 years from settlement Face = 1000; BondData = [CleanPrice CouponRate datenum(Maturity) Face]; Period = 2; Basis = 1; % call Black's model CallPrices = bkcall(Strike, ZeroData, Sigma, BondData, Settle,... Expiry, Period, Basis, [], [], Convention)

`CallPrices = `*2×1*
9.4873
7.9686

When the strike price is the dirty price (`Convention`

= `0`

), the call option value is $9.49. When the strike price is the clean price (`Convention`

= `1`

), the call option value is $7.97.

## Input Arguments

`Strike`

— Strike price

numeric

Strike price, specified as a scalar numeric or an
`NOPT`

-by-`1`

vector of strike prices.

**Data Types: **`double`

`ZeroData`

— Zero rate information used to discount future cash flows

matrix

Zero rate information used to discount future cash flows, specified using a two-column (optionally three-column) matrix containing zero (spot) rate information used to discount future cash flows.

Column 1 — Serial maturity date associated with the zero rate in the second column.

Column 2 — Annualized zero rates, in decimal form, appropriate for discounting cash flows occurring on the date specified in the first column. All dates must occur after

`Settle`

(dates must correspond to future investment horizons) and must be in ascending order.Column 3 — (optional) Annual compounding frequency. Values are

`1`

(annual),`2`

(semiannual, default),`3`

(three times per year),`4`

(quarterly),`6`

(bimonthly),`12`

(monthly), and`-1`

(continuous).

If cash flows occur beyond the dates spanned by `ZeroData`

, the
input zero curve, the appropriate zero rate for discounting such cash flows is obtained
by extrapolating the nearest rate on the curve (that is, if a cash flow occurs before
the first or after the last date on the input zero curve, a flat curve is
assumed).

In addition, you can use the method `getZeroRates`

for an `IRDataCurve`

object with a
`Dates`

property to create a vector of dates and data acceptable for
`bkcall`

. For more information, see Converting an IRDataCurve or IRFunctionCurve Object.

**Data Types: **`double`

`Sigma`

— Annualized price volatilities required by Black model

numeric

Annualized price volatilities required by the Black model, specified as a scalar or
an `NOPT`

-by-`1`

vector.

**Data Types: **`struct`

`BondData`

— Characteristics of underlying bonds

vector

Characteristics of underlying bonds, specified as a row vector with three
(optionally four) columns or `NOPT`

-by-`3`

(optionally
`NOPT`

-by-`4`

) matrix specifying characteristics of
underlying bonds in the form:

`[CleanPrice CouponRate Maturity Face]`

`CleanPrice`

is the price excluding accrued interest.`CouponRate`

is the decimal coupon rate.`Maturity`

is the bond maturity date in serial date number format.`Face`

is the face value of the bond. If unspecified, the face value is assumed to be 100.

**Data Types: **`double`

`Settle`

— Settlement date

date character vector | serial date number

Settlement date, specified as a serial date number or date character vector.
`Settle`

also represents the starting reference date for the input
zero curve.

**Data Types: **`char`

| `double`

`Expiry`

— Option maturity date

date character vector | serial date number

Option maturity date, specified as a scalar or an
`NOPT`

-by-`1`

vector of serial date numbers or cell
array of date character vectors.

**Data Types: **`char`

| `cell`

| `double`

`Period`

— Number of coupons per year for underlying bond

`2`

(semiannual) (default) | integer with value `0`

, `1`

,
`2`

, `3`

, `4`

, `6`

,
or `12`

(Optional) Number of coupons per year for the underlying bond, specified as an
integer with supported values of `0`

, `1`

,
`2`

, `3`

, `4`

,
`6`

, and `12`

.

**Data Types: **`double`

`Basis`

— Day-count basis of underlying bonds

`0`

(actual/actual) (default) | integer from `0`

to `13`

(Optional) Day-count basis of underlying bonds, specified as a scalar or an
`NOPT`

-by-`1`

vector using the following values:

0 = actual/actual

1 = 30/360 (SIA)

2 = actual/360

3 = actual/365

4 = 30/360 (PSA)

5 = 30/360 (ISDA)

6 = 30/360 (European)

7 = actual/365 (Japanese)

8 = actual/actual (ICMA)

9 = actual/360 (ICMA)

10 = actual/365 (ICMA)

11 = 30/360E (ICMA)

12 = actual/365 (ISDA)

13 = BUS/252

For more information, see Basis.

**Data Types: **`double`

`EndMonthRule`

— End-of-month rule flag

`1`

(in effect) (default) | nonnegative integer `[0,1]`

(Optional) End-of-month rule flag, specified as a scalar or an
`NOPT`

-by-`1`

vector of end-of-month rules.

`0`

= Ignore rule, meaning that a bond coupon payment date is always the same numerical day of the month.`1`

= Set rule on, meaning that a bond coupon payment date is always the last actual day of the month.

**Data Types: **`logical`

`InterpMethod`

— Zero curve interpolation method

`1`

(linear interpolation) (default) | integer with value `0`

, `1`

, or
`2`

(Optional) Zero curve interpolation method for cash flows that do not fall on a date
found in the `ZeroData`

spot curve, specified as a scalar integer.
`InterpMethod`

is used to interpolate the appropriate zero discount
rate. Available interpolation methods are (`0`

) nearest,
(`1`

) linear, and (`2`

) cubic. For more information
on interpolation methods, see `interp1`

.

**Data Types: **`double`

`StrikeConvention`

— Option contract strike price convention

`0`

(default) | integer with value `0`

or `1`

(Optional) Option contract strike price convention, specified as a scalar or an
`NOPT`

-by-`1`

vector.

`StrikeConvention = 0`

(default) defines the strike price as the
cash (dirty) price paid for the underlying bond.

`StrikeConvention = 1`

defines the strike price as the quoted
(clean) price paid for the underlying bond. When evaluating Black's model, the accrued
interest of the bond at option expiration is added to the input strike price.

**Data Types: **`double`

## Output Arguments

`CallPrice`

— Price for European call option on bonds derived from Black model

vector

Price for European call option on bonds derived from the Black model, returned as a
`NOPT`

-by-`1`

vector.

## References

[1] Hull, John C. *Options,
Futures, and Other Derivatives.* 5th Edition, Prentice Hall, 2003, pp. 287–288,
508–515.

## See Also

**Introduced before R2006a**

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