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I'd like to find out how to calculate the level of a zero coupon bond that goes into a fully funded structured product. Let's say SocGen or JPM issue a 2Y fully funded structured note (zero coupon + option) in USD or EUR, then based on the available market data, i.e. swap rates, xccy swap rates, CDS, etc. how could I figure out the level of funding (rate) they provide to investors, i.e. what is the price of a zero coupon bond they issue.

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You just subtract the price of the option from 100 (assuming the structured note is issued at par), giving the price of the zero coupon bond. Then, you calculate the yield of the zero coupon bond given its price and maturity. Finally, you subtract the yield of the nearest risk free government bond, to get the spread over governments.

Edit to answer your question: how we can figure out these funding rates for different banks with different ratings and with different CDS spreads.

The easiest way is to observe the yield of vanilla bonds issued by the same issuer in the same maturity( or as close as you can get). This will determine the funding rate given by the bank Treasury to the structured note desk.

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  • $\begingroup$ Thank you very much. That's very useful. I'd like to perhaps look into this from a slightly different point of view. Say, we start with figuring out what the zero coupon price is going to be in order to know how much we can spend on the option so that ZCB + Option = 100%. So a trader whose desk would quote the structured note would probably get a quote from her/his treasury, i.e. would be quoted funding rates for different tenors. I'm trying to understand how we can figure out these funding rates for different banks with different ratings and with different CDS spreads. Thank you. $\endgroup$
    – eMe
    Oct 27, 2023 at 15:52
  • $\begingroup$ Thanks. Very helpful. If, say, SocGen issue only debt in EUR and USD for the maturity I'm interested in, how would I figure out the funding rate for GBP of JPY ? What xccy swap would I need to use for that ? XCCY OIS basis swap ? Appreciate your help. $\endgroup$
    – eMe
    Oct 28, 2023 at 10:13
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    $\begingroup$ Yes xxxy basis swap between risk free rates $\endgroup$
    – dm63
    Oct 28, 2023 at 11:19

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