On the Pricing of GDP-Linked Financial Products

This paper discusses the pricing of GDP-linked financial products. GDPlinked bonds for instance are bonds which pay a coupon tied to the changes of GDP (Gross Domestic Product): if economic growth is low, the coupon decreases while a strong economic rise leads to a higher coupon. Therefore these innovative financial instruments are able to translate changes in the business cycle and long-term prospects into changes in the issuing country's debt service, taking into account GDP development. Against the background of a growing interest in macro-indexed financial instruments and Argentinas very recent offer to issue GDP-linked bonds, we briefly discuss different characteristics of GDP-linked bonds and provide a simple pricing approach for GDP-linked bonds and European options on GDP development assuming a Black-Scholes type environment.

Kruse, Susanne, Matthias Meitner and Michael Schröder (2005), On the Pricing of GDP-Linked Financial Products, Applied Financial Economics 15 , 1125-1133