Embedded Options in Green Bonds and Designing Investment Strategies: A Study Based on the Black-Scholes Model

DOI

10.2991/978-94-6463-811-0_53How to use a DOI?

Keywords

Green bonds; Embedded options; Black-Scholes model; Volatility calibration; Sustainable finance

Abstract

As sustainable development becomes a global consensus, green bonds have emerged as a critical instrument for financing environmentally beneficial projects. In addition to their environmental focus, the increasing adoption of embedded options—such as callable and puttable structures—has introduced new complexities into green bond pricing and investment analysis. This study aims to explore the theoretical pricing of embedded put options in green bonds using a modified Black-Scholes (BS) model and to derive investment implications based on model outputs. Taking “22 Tonglu 01,” a municipal green bond with a put option, as the empirical subject, the research calibrates model parameters from actual market data, including valuation prices, government bond yields, and index-based volatility. The embedded option is priced using a BS framework adapted for fixed-income features. Sensitivity analysis confirms that volatility significantly affects the option value, indicating the importance of accurate parameter estimation. The findings validate the feasibility of applying a calibrated BS model to green bond valuation and demonstrate that embedded options, even with limited magnitude, contribute meaningful risk management value. This approach offers theoretical guidance and methodological tools for pricing complex green bond structures in low-liquidity environments.

Copyright

© 2025 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Zejia Duan
PY  - 2025
DA  - 2025/08/14
TI  - Embedded Options in Green Bonds and Designing Investment Strategies: A Study Based on the Black-Scholes Model
BT  - Proceedings of the 2025 5th International Conference on Enterprise Management and Economic Development (ICEMED 2025)
PB  - Atlantis Press
SP  - 510
EP  - 517
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-811-0_53
DO  - 10.2991/978-94-6463-811-0_53
ID  - Duan2025
ER  -