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Yield-Based Option

What is 'Yield-Based Option'

A type of debt-instrument-based option that derives its value from the difference between the exercise price and the value of the yield of the underlying debt instrument. Yield-based options are settled in cash. A yield-based call buyer expects interest rates to go up, while a yield-based put buyer expects interest rates to go down.

Explaining 'Yield-Based Option'

If the interest rate of the underlying debt security rises above the strike price of a yield-based call option plus the premium paid, the call holder is 'in the money'. Should the opposite occur, and the interest rate falls below the strike price less the premium paid for a yield-based put option, the put holder is in the money.


Further Reading


A real option analysis of investments in hydropower—The case of Norway
www.sciencedirect.com [PDF]
… Table 2. Relative convenience yield based for the next 2 years quarterly (CY 1q1–CY 2q4 … Scholar. Black and Scholes, 1973 F. Black, M. ScholesThe pricing of options and corporate … contingent claims. D. Lund, B. Øksendal (Eds.), Stochastic Models and Option Values, North …

Difference systems in financial futures marketsDifference systems in financial futures markets
onlinelibrary.wiley.com [PDF]
… Table 2. Relative convenience yield based for the next 2 years quarterly (CY 1q1–CY 2q4 … Scholar. Black and Scholes, 1973 F. Black, M. ScholesThe pricing of options and corporate … contingent claims. D. Lund, B. Øksendal (Eds.), Stochastic Models and Option Values, North …

Relative scarcity and convenience yield: evidence from non-ferrous metalsRelative scarcity and convenience yield: evidence from non-ferrous metals
www.tandfonline.com [PDF]
… Table 2. Relative convenience yield based for the next 2 years quarterly (CY 1q1–CY 2q4 … Scholar. Black and Scholes, 1973 F. Black, M. ScholesThe pricing of options and corporate … contingent claims. D. Lund, B. Øksendal (Eds.), Stochastic Models and Option Values, North …

How relevant is volatility forecasting for financial risk management?How relevant is volatility forecasting for financial risk management?
www.mitpressjournals.org [PDF]
… Table 2. Relative convenience yield based for the next 2 years quarterly (CY 1q1–CY 2q4 … Scholar. Black and Scholes, 1973 F. Black, M. ScholesThe pricing of options and corporate … contingent claims. D. Lund, B. Øksendal (Eds.), Stochastic Models and Option Values, North …

Firm valuation and accounting for employee stock optionsFirm valuation and accounting for employee stock options
www.tandfonline.com [PDF]
… Table 2. Relative convenience yield based for the next 2 years quarterly (CY 1q1–CY 2q4 … Scholar. Black and Scholes, 1973 F. Black, M. ScholesThe pricing of options and corporate … contingent claims. D. Lund, B. Øksendal (Eds.), Stochastic Models and Option Values, North …

Dividend-yield based trading rules: The Turkish evidenceDividend-yield based trading rules: The Turkish evidence
papers.ssrn.com [PDF]
… Table 2. Relative convenience yield based for the next 2 years quarterly (CY 1q1–CY 2q4 … Scholar. Black and Scholes, 1973 F. Black, M. ScholesThe pricing of options and corporate … contingent claims. D. Lund, B. Øksendal (Eds.), Stochastic Models and Option Values, North …

Measuring the manufacturing process yield based on fuzzy dataMeasuring the manufacturing process yield based on fuzzy data
www.tandfonline.com [PDF]
… Table 2. Relative convenience yield based for the next 2 years quarterly (CY 1q1–CY 2q4 … Scholar. Black and Scholes, 1973 F. Black, M. ScholesThe pricing of options and corporate … contingent claims. D. Lund, B. Øksendal (Eds.), Stochastic Models and Option Values, North …

Technological and financial approaches to risk management in agriculture: an integrated approachTechnological and financial approaches to risk management in agriculture: an integrated approach
onlinelibrary.wiley.com [PDF]
… Table 2. Relative convenience yield based for the next 2 years quarterly (CY 1q1–CY 2q4 … Scholar. Black and Scholes, 1973 F. Black, M. ScholesThe pricing of options and corporate … contingent claims. D. Lund, B. Øksendal (Eds.), Stochastic Models and Option Values, North …

Improving the predictability of real economic activity and asset returns with forward variances inferred from option portfoliosImproving the predictability of real economic activity and asset returns with forward variances inferred from option portfolios
www.sciencedirect.com [PDF]
… Table 2. Relative convenience yield based for the next 2 years quarterly (CY 1q1–CY 2q4 … Scholar. Black and Scholes, 1973 F. Black, M. ScholesThe pricing of options and corporate … contingent claims. D. Lund, B. Øksendal (Eds.), Stochastic Models and Option Values, North …



Q&A About Yield-Based Option


How can you get hedging benefits from yield-based options?

You cannot get hedging benefits from conventional assets like stocks and bonds.

What must you use to get hedging benefits from yield-based options?

You must use a derivative product called an interest rate cap or floor to get hedging benefits.

Are there any other types of options that can be used as hedging instruments for bonds or fixed income securities besides Yield Based Options ?

Yes, there are other types including Interest Rate Cap and Floor Options .

Where can you find information on how to trade in these derivatives?

You can find information on trading in these derivatives at the Chicago Board Options Exchange (CBOE).

Where else can you find information on how to trade in these derivatives?

You can also find information on trading in these derivatives at the Federal Reserve Bank of St. Louis .

If an investor buys a Yield Based Call Option, what happens if the underlying security's interest rate rises above the strike price plus premium paid?

The investor will be in "the money."

What is a yield-based option?

A yield-based option is a type of debt instrument based option that derives its value from the difference between the exercise price and the value of the yield of the underlying debt instrument.

What does a yield-based put buyer expect interest rates to do?

A yield-based put buyer expects interest rates to go down.

How are Yield Based Options settled?

In cash.

If an investor buys a Yield Based Put Option, what happens if the underlying security's interest rate falls below strike price less premium paid?

The investor will be in "the money."

What does a yield-based call buyer expect interest rates to do?

A yield-based call buyer expects interest rates to go up.

What are yield-based options?

Yield-based options are a type of option that allows investors to hedge against interest rates.

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