Research On Carbon Bond Valuation Based On Carbon Option Pricing Model

The Chinese government announced in December 2019 that it had fulfilled its international commitments made at the UN climate change conference ahead of schedule,and that its greenhouse gas emissions had dropped by 50 percent compared with 2005.During this period,China conducted a large number of international carbon emission rights trading with certified Emission Reduction(CERs),and started the domestic carbon Emission rights trading market.In December 2017,China officially started the construction of the national carbon emission trading market.At present,pilot carbon markets are taking shape and showing results in reducing emissions,and steady progress is being made in building a national carbon emission trading market.With the trade of carbon emission rights becoming more and more active,various carbon financial instruments represented by carbon bonds are emerging along with the trend.Their core feature is to link the emission reduction income of low-carbon projects with the interest rate of bonds.China’s carbon bonds are represented by 14 Nuclear Wind Power MTN001.The valuation model constructed in this paper regards CGNPC carbon bonds as a structured product of fixed-rate bonds embedded in options,and considers that the valuation of carbon bonds is equal to the sum of the two values.The discounted cash flow model is applied to fixed-rate bonds,and the option pricing is mainly discussed.Firstly,the trading data of carbon emission rights from shenzhen carbon emission exchange of China are selected to calculate the rate of return sequence.Hurst test on the rate of return series shows that the test value is 0.3993,less than 0.5,indicating that the change process of carbon emission permit price in China is likely not subject to geometric Brownian motion,and fractal Brownian motion is more suitable for describing the movement process of carbon emission permit price.After a series of standard metrological tests,such as stationarity test and ARCH test,the most suitable GARCH model is tried to be constructed according to the test results of the rate of return series.Based on the established model,the volatility of the logarithm of carbonemission rights return is predicted.Finally,all the parameters are substituted into the option pricing model and the value of carbon option is solved by monte carlo simulation method.Next,the principal and interest repayment of CGNPC carbon bonds issued in2014 will be analized,this paper finds that the previous period of bonds did not achieve the expected carbon income.In order to guarantee investors’ returns,this paper further improves the structural design of carbon option attached to fixed-rate bonds of CGN carbon bonds.It is assumed that CGN wind power company will issue carbon bonds with improved terms again in 2020,so as to complete the valuation process of a new phase of carbon bonds.