Valuation model for Chinese convertible bonds with soft call/put provision under the hybrid willow tree

This paper provides a structural valuation model for exchangeable convertible bonds, since such bonds are widespread by now. The model is solved through the Hopscotch finite difference method. As the issuer owns the underlying shares, exchangeable convertibles may be called and the exchange option may be exercised even as the issuer experiences financial distress. The value of exchangeable convertibles always decreases in the volatility of the issuer's assets (unlike the value of ordinary convertibles) and decreases in the correlation between the underlying shares and the issuer's assets. The analysis confirms that the dominant motive for issuing exchangeable convertibles is likely to be to dispose of the underlying shares.

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The Analysis of Chinese Convertible Bond Market

Journal of Economics and Public Finance ◽

10.22158/jepf.v6n2p104 ◽

2020 ◽

Vol 6 (2) ◽

pp. p104

Author(s):

Yuxin Tian ◽

Jun Chen

Keyword(s):

Portfolio Management ◽

Convertible Bonds ◽

Bond Market ◽

Comprehensive Analysis ◽

Convertible Bond ◽

Historical Evolution ◽

Chinese Market ◽

Valuation Model ◽

Black Scholes Model ◽

Black Scholes

Convertible bond is a type of hybrid security with both bond- and stock-like features. The Chinese market of convertible bonds has developed dramatically during the last decade. This paper will conduct a comprehensive analysis of this market. Firstly, a brief introduction of convertible bond and the historical evolution of this market in China is presented, then we analyze various investment risks related to convertible bonds. Next, this paper proposes the basic valuation model for convertible bonds, which is the Black-Scholes model and modifies it by taking the delusion effect of conversion into account, leading to the Gailai-Schneller model. In addition, the differences of the outcomes obtained by these two models are compared and analyzed based on the pricing of Shanghai Electric convertible bond. In the sixth part, this paper mainly explains two types of applications of convertible bonds in portfolio management. In the end, several problems existing in Chinese convertible market as well as some suggestions for solving them are discussed.

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THE VALUATION OF CALLABLE-PUTTABLE REVERSE CONVERTIBLE BONDS

Asia Pacific Journal of Operational Research ◽

10.1142/s0217595910002636 ◽

2010 ◽

Vol 27 (02) ◽

pp. 189-209 ◽

Cited By ~ 4

Author(s):

KYOKO YAGI ◽

KATSUSHIGE SAWAKI

Keyword(s):

Optimal Stopping ◽

Optimal Strategies ◽

Convertible Bonds ◽

Convertible Bond ◽

Optimal Stopping Problem ◽

Valuation Model ◽

Analytical Properties ◽

A Company

Many companies issue some complex structured bonds. A reverse convertible bond is one of such structured bonds. In this paper we consider a valuation model of callable-puttable reverse convertible bonds which have the complex payoff in a setting of the optimal stopping problem between the issuer and the investor. Reverse convertible bonds issued by a company can be exchanged for the shares of another company. We analyze the pricing of reverse convertible bonds with call and put clauses and explore analytical properties of the value of the reverse convertible bond and optimal call and put boundaries by the issuer and the investor, respectively. Furthermore, we investigate how the call and put clauses affect the value and the optimal strategies for both of them.

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