Mastering Python for Finance - Second Edition

The value of early exercise

Issuers of callable bonds may redeem the bond at an agreed price, as specified in the contract. To price such a bond, the discounted early-exercise values can be defined as follows:

Here, k is the price ratio of the strike price to the par value and r is the interest rate for the strike price.

The Python implementation of the early-exercise option can then be written as follows:

In [ ]:    import math    def exercise_value(K, R, t):        return K*math.exp(-R*t)

In the preceding example, we are interested in valuing a call option with a strike ratio of 0.95 and an initial interest rate of 1.5%. We can then plot the values as ...