Design of green bonds by double-barrier options

Green finance is an innovative model that can promote sustainable economic development. The green bonds also develop gradually as a part of green finance. The green bonds are designed to fund the projects of positive environmental impact. If the green bonds are superior to other debt securities, they will attract more investors' participation in green energy projects. Thus, the design of green bonds is crucial to the development of green bonds market. This article assumes that the floating rate of green bonds is linked to carbon price, and carbon price is described by a jump diffusion process. The carbon price fluctuation can lead to interest rate fluctuation of green bonds. We set two boundary values of carbon price, and the coupon rate is revalued when the carbon price reaches the boundary. The higher the carbon price is, the higher the coupon rate is to be paid by issuers. Thus, the boundary can impel issuers to boost energy savings and emission-reduction, and the higher interest rate will also attract more investors to invest in green bonds. The lower the carbon price is, the lower the interest rate is to be paid by issuers. Accordingly, the boundary may encourage issuers to boost emission reduction. This design can monitor and incentivize issuers to make more contribution to green finance. Furthermore, the design is characterized by the double-barrier option, such that the interest rate of green bonds can be obtained by double-barrier option pricing. Subsequently, the central difference method and the composite trapezoidal formula are employed to obtain the numerical solution. Finally, we conduct the sensitivity analysis of the model.