Municipal Bond Option Model

Municipal Bond Options are European-style vanilla options on coupon bonds. The Municipal Bond Option Pricing Model is used for daily calculations of P&L and risk numbers.

These options are of vanilla European type. Black’s model (Black-76 model) is applied in the bond option pricing model. The discount curve is composed of a set of short tern rates, LIBORs up to two years and a set of medium to long term (2 years – 30 years) AAA yields with linear interpolation.