The Issues and Improvement Plans of Pricing and Accounting of the Structured Derivatives : The Case of Zero-Coupon Callable Bond

Abstract

This study aims to deal with the valuation and accounting of complex derivative instruments. This study attempts to propose a convergence plan by presenting a pricing (fair value evaluation) alternative that considers the accounting process. In this paper, we choose a ZCCB as a representative structured derivative and conduct a case study.

Regarding the expected maturity of ZCCB, there is a need to adjust the historical expected maturity by reflecting the implied expected maturity. As a result of simulation and empirical analysis, it can be seen that the greatest feature of the expected maturity distribution is the Bi-Modal distribution redeemed immediately after the non-call period or at the maturity of the ZCB. Therefore, when using expected maturity, it would be more meaningful to use ZCB maturity date or just after non-call period date rather than the average.

Regarding whether ZCCB's SPPI test is satisfied, the ZCCB return rate is determined according to market input variables and bond issuance conditions and is already fixed at issuance, so it can be judged that the SPPI condition is satisfied.

Citation

Yang, J.P., Chang, U. and Choi, Y.S. (2018), "The Issues and Improvement Plans of Pricing and Accounting of the Structured Derivatives : The Case of Zero-Coupon Callable Bond", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 26 No. 2, pp. 153-182. https://doi.org/10.1108/JDQS-02-2018-B0001