Do you agree that the pricing of all dual-currency bonds is an application of option pricing?
What will be an ideal response?
An option gives the holder the right to future claims conditioned upon contingent outcomes. To be an application of option pricing, an option must be present or embedded in the asset (in this case a dual-currency bond). As discussed in part (a), there are three types of dual-currency bonds. Only the third type is referred to with the description option (implying that a choice can be made that will give the holder the best outcome based upon what contingent outcomes actually unfold). For the first type of dual-currency bond, the exchange rate that is used to convert the principal and coupon payments into a specific currency is specified at the time the bond is issued. Thus, the future claim is already stated and is not contingent upon some other condition occurring. Similarly, the second type does not appear to have any future claim contingent upon some condition occurring.
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