Publication Type
Journal Article
Version
acceptedVersion
Publication Date
7-2020
Abstract
The Singapore Savings Bonds (SSB) is a unique investment program offered by the Singapore government whereby retail investors can earn risk-free tax-free step-up interest closely matched to Treasury bond rates for up to 10 years and can redeem on any business day prior to maturity without any early redemption penalty. This study analyses the unique design of the SSB and provides a valuation of the Bermudan option for early redemption that is embedded in the SSB. The Black-Derman-Toy model is used to build the interest rate tree, and an iterative method is employed to avoid arbitrary specification of the pre-determined short rate volatility function. This bespoke Bermudan option can have changing strike prices over time. It also has a novel characteristic whereby the value of exercise to a buyer need not equal to the cost of being exercised to a seller. Better understanding of embedded options within government savings bonds leads to innovative designs that may encourage effective citizens’ savings.
Keywords
Bespoke Bermudan option, Singapore Savings Bonds, Iterative Black-Derman-Toy model, Spot rate model
Discipline
Asian Studies | Finance and Financial Management
Research Areas
Finance
Publication
Review of Derivatives Research
Volume
24
Issue
1
First Page
31
Last Page
54
ISSN
1380-6645
Identifier
10.1007/s11147-020-09168-y
Citation
LIM, Kian Guan.
Bermudan option in Singapore savings bonds. (2020). Review of Derivatives Research. 24, (1), 31-54.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6616
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1007/s11147-020-09168-y