THE VALUATION OF CALLABLE-PUTTABLE REVERSE CONVERTIBLE BONDS

2010 ◽  
Vol 27 (02) ◽  
pp. 189-209 ◽  
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.

scholarly journals The Analysis of Chinese Convertible Bond Market

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.

scholarly journals Wealth effects of convertible bond issues – further evidence of agency costs and managerial entrenchment

2010 ◽  
Vol 7 (4) ◽  
pp. 34-49
Author(s):  
Christopher Fink ◽  
Dirk Schiereck ◽  
Joachim Vogt
Keyword(s):  
Empirical Evidence ◽  
Agency Costs ◽  
Convertible Bonds ◽  
Wealth Effects ◽  
Convertible Bond ◽  
Convertible Debt ◽  
Managerial Entrenchment ◽  
Theoretical Approaches ◽  
Bond Issues ◽  
A Company

There is still some ambiguity about the company’s motivation for using the hybrid finance instrument of convertible bonds. Although manifold theoretical approaches provide varying assumptions about the rationale behind the issuance of convertible bonds, the empirical evidence about the major issuance reasons and the subsequent wealth impacts for the issuer remains mixed. The purpose of our study is to evaluate the relevance of these various theoretical approaches to explain empirically the motivation and characteristics of a company when issuing convertible debt and the resulting wealth effects for the company’s shareholders

scholarly journals On a simple optimal stopping problem

1973 ◽  
Vol 5 (4) ◽  
pp. 297-312 ◽  
Author(s):  
William M. Boyce
Keyword(s):  
Optimal Stopping ◽  
Optimal Stopping Problem

A Note on a Lower Bound for the Multiplicative Odds Theorem of Optimal Stopping

2014 ◽  
Vol 51 (03) ◽  
pp. 885-889 ◽  
Author(s):  
Tomomi Matsui ◽  
Katsunori Ano
Keyword(s):  
Lower Bound ◽  
Optimal Stopping ◽  
Secretary Problem ◽  
Bernoulli Trials ◽  
Optimal Stopping Problem ◽  
Maximum Probability ◽  
Optimal Stopping Rule ◽  
Optimal Probability ◽  
Optimal Stopping Theory ◽  
Special Case

In this note we present a bound of the optimal maximum probability for the multiplicative odds theorem of optimal stopping theory. We deal with an optimal stopping problem that maximizes the probability of stopping on any of the last m successes of a sequence of independent Bernoulli trials of length N, where m and N are predetermined integers satisfying 1 ≤ m < N. This problem is an extension of Bruss' (2000) odds problem. In a previous work, Tamaki (2010) derived an optimal stopping rule. We present a lower bound of the optimal probability. Interestingly, our lower bound is attained using a variation of the well-known secretary problem, which is a special case of the odds problem.

scholarly journals Do Callable Convertibles Support The Investment Process Of A Company? An Analysis Of The World Market Of Hybrid Debt

2017 ◽  
Vol 20 (2) ◽  
pp. 5-19
Author(s):  
Damian Kaźmierczak
Keyword(s):  
United States ◽  
The United States ◽  
World Market ◽  
Convertible Bonds ◽  
Investment Projects ◽  
Service Companies ◽  
The World ◽  
Investment Process ◽  
A Company

Using a sample of 1,705 convertible bonds issued by manufacturing and service companies from the United States (1,138 issues); Europe (270); and Asia (297) between 2004 and 2014 this paper investigates the role of callable convertibles in the corporate investment process. This research shows first that callable convertibles are used to finance investment projects particularly by American firms which may exercise new investment options to improve poor financial performance. Secondly, the same strategy may be followed by European companies, but they seem not to carry out investments on as large a scale as American firms. Thirdly, the research results do not provide evidence that Asian enterprises use callable convertibles for investment purposes: they likely use these instruments for different reasons.

Pricing Convertible Bond in Uncertain Financial Market

2021 ◽  
pp. 2150007
Author(s):  
Zhiqiang Zhang ◽  
Zhenfang Wang ◽  
Xiaowei Chen
Keyword(s):  
Differential Equation ◽  
Financial Market ◽  
Stock Price ◽  
Uncertainty Theory ◽  
Convertible Bonds ◽  
Convertible Bond ◽  
Uncertain Differential Equation ◽  
Numerical Examples ◽  
Liu Process ◽  
Uncertain Calculus

This paper is devoted to evaluating the convertible bonds within the framework of uncertainty theory. Under the assumption that the underlying stock price follows an uncertain differential equation driven by Liu process, the price formulas of convertible bonds and the callable convertible bonds are derived by using the method of uncertain calculus. Finally, two numerical examples are discussed.

ON THE VALUATION OF DERIVATIVES WITH SNAPSHOT RESET FEATURES

2008 ◽  
Vol 11 (08) ◽  
pp. 905-941 ◽  
Author(s):  
ERIC C. K. YU ◽  
WILLIAM T. SHAW
Keyword(s):  
Convertible Bonds ◽  
Convertible Bond ◽  
Put Options ◽  
Risk Characteristics ◽  
Black Scholes ◽  
Barrier Type ◽  
Simple Change ◽  
Discontinuous Nature ◽  
Change Of Variable ◽  
Digital Options

We propose a general approach that requires only a simple change of variable that keeps the valuation of call and put options (convertible bonds) with strike (conversion) price resets two-dimensional in the classical Black–Scholes setting. A link between reset derivatives, compound options and "discrete barrier" type options, when there is one reset is then discussed, from which we analyze the risk characteristics of reset derivatives, which can be significantly different from their vanilla counterparts. We also generalize the prototype reset structure and show that the delta and gamma of a convertible bond with reset can both be negative. Finally, we show that the "waviness" property found in the delta and gamma of some reset derivatives is due to the discontinuous nature of the reset structure, which is closely linked to digital options.

VALUATION OF EXCHANGEABLE CONVERTIBLE BONDS

2004 ◽  
Vol 07 (06) ◽  
pp. 701-721 ◽  
Author(s):  
MARCO REALDON
Keyword(s):  
Finite Difference ◽  
Finite Difference Method ◽  
Difference Method ◽  
Financial Distress ◽  
Convertible Bonds ◽  
Valuation Model ◽  
Exchange Option

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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