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.

Pricing resettable convertible bonds using an integral equation approach

2019 ◽  
Vol 31 (4) ◽  
pp. 417-443
Author(s):  
Sha Lin ◽  
Song-Ping Zhu
Keyword(s):  
Integral Equation ◽  
Convertible Bonds ◽  
Convertible Bond ◽  
Equation Approach ◽  
Fair Price ◽  
Bond Price ◽  
Black Scholes Model ◽  
Black Scholes ◽  
Integral Equation Approach ◽  
Increasing Function

Abstract In this paper, the fair price of an American-style resettable convertible bond (CB) under the Black–Scholes model with a particular reset clause is calculated. This is a challenging problem because an unknown optimal conversion price needs to be determined together with the bond price. There is also an additional complexity that the value of the conversion ratio will change when the underlying price touches the reset price. Because of the additional reset clause, the bond price is not always a monotonically increasing function with the underlying price, which is impossible for other types of the CBs. Of course, the problem can be dealt with using the Monte-Carlo simulation. But, a partial differential equation (PDE)/integral equation approach is far superior in terms of computational efficiency. Fortunately, after establishing the PDE system governing the bond price, we are able to present an integral equation representation by applying the incomplete Fourier transform on the PDE system.

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.

scholarly journals Pricing Convertible Bonds with Credit Risk under Regime Switching and Numerical Solutions

2014 ◽  
Vol 2014 ◽  
pp. 1-13
Author(s):  
Wei-Guo Zhang ◽  
Ping-Kang Liao
Keyword(s):  
Credit Risk ◽  
Regime Switching ◽  
Numerical Solutions ◽  
Dilution Effect ◽  
Convertible Bonds ◽  
Bond Pricing ◽  
Convertible Bond ◽  
Pricing Model ◽  
Black Scholes ◽  
The Impact

This paper discusses the convertible bonds pricing problem with regime switching and credit risk in the convertible bond market. We derive a Black-Scholes-type partial differential equation of convertible bonds and propose a convertible bond pricing model with boundary conditions. We explore the impact of dilution effect and debt leverage on the value of the convertible bond and also give an adjustment method. Furthermore, we present two numerical solutions for the convertible bond pricing model and prove their consistency. Finally, the pricing results by comparing the finite difference method with the trinomial tree show that the strength of the effect of regime switching on the convertible bond depends on the generator matrix or the regime switching strength.

Stochastic equity volatility and the capital structure of the firm

1994 ◽  
Vol 347 (1684) ◽  
pp. 531-541 ◽  
Keyword(s):  
Capital Structure ◽  
Convertible Bonds ◽  
Analytic Approximation ◽  
Financial Instruments ◽  
Stochastic Nature ◽  
Basic Model ◽  
Black Scholes Model ◽  
Black Scholes ◽  
Corporate Securities ◽  
The Impact

This paper develops a general model for equity volatility when the firm is financed by equity, debt and any other financial instruments like warrants and convertible bonds. The stochastic nature of equity volatility is endogenous and comes from the impact of a change in the value of the firm’s assets on the financial leverage. We first present the basic model to value corporate securities, which is an extension of the Black-Scholes model. Then, we are able to propose an analytic approximation for equity volatility, which is shown to be extremely precise. Finally, we study the behaviour of equity volatility when the firm is financed by equity and debt.

scholarly journals Research on the Pricing of Convertible bonds in China---Migration risk based on credit rating

2021 ◽  
Vol 3 (6) ◽  
Author(s):  
Zhang Heng ◽  
Yuyang Zhao ◽  
Qiguang An
Keyword(s):  
Credit Rating ◽  
Market Price ◽  
Convertible Bonds ◽  
Bond Market ◽  
Convertible Bond ◽  
Average Deviation ◽  
Healthy Development ◽  
Credit Risks ◽  
Deviation Rate ◽  
The Impact

At present, further research and exploration on credit risks are being carried out in the global field, and increasingly profound modern credit risks are exposed to the bond market. This requires that we cannot ignore the impact of credit rating migration risk on bond pricing, so as to adapt to the sustainable and healthy development of the bond market under the new normal of China's economy. The innovation point of this paper is to try to analyze the pricing of Convertible bonds in China from the perspective of credit rating migration risk. Tsiveriotis and Fernandes(1998) model is selected, and the credit risk in the model is assumed to be caused by the credit rating migration risk, and the credit spread is used to measure the credit rating migration risk. The research conclusion of this paper is as follows: First, it is valid to consider the risk of credit rating migration in the TF(1998) model. The market price of convertible bonds is on average 1.22% higher than the theoretical value of the model. In general, the theoretical value obtained from the model has little deviation from the market price, and has a good fitting degree. Second, from the Angle of credit rating, the selection of 32 samples of convertible bonds only empirical research shows that the credit rating of AA - convertible bonds average deviation rate is negative, suggest that the credit rating of AA - the phenomenon of convertible bonds value is underestimated, and AAA credit rating to AA, AA +, the average deviation rate of convertible bonds is positive, that credit rating AA (containing AA) more convertible bond value is overrated phenomenon, and the higher the credit rating of the average deviation rate of convertible bond, the greater the overvalued levels. It has certain guiding significance for participants in the convertible bond market.

Volatility cones and volatility arbitrage strategies – empirical study based on SSE ETF option

2017 ◽  
Vol 7 (2) ◽  
pp. 203-227 ◽  
Author(s):  
Hong Yu Xin Pan ◽  
Jun Song
Keyword(s):  
Transaction Costs ◽  
Stochastic Volatility Model ◽  
Chinese Market ◽  
Content Type ◽  
Black Scholes Model ◽  
Volatility Model ◽  
Black Scholes ◽  
Arbitrage Strategy ◽  
Real Market ◽  
First Time

Purpose Using volatility cones as the estimate of actual volatility instead of GARCH models, the purpose of this paper is to explore whether volatility arbitrage strategy can provide positive profits and how the transaction costs existed in the real market affect the effectiveness of volatility arbitrage strategy. Design/methodology/approach A number of hedging approaches proposed to improve the hedging results and final returns of Black-Scholes model are analyzed and compared. Findings The general finding is that volatility arbitrage strategy can provide satisfactory returns based on the samples in Chinese market. Regarding transaction costs, the variable bandwidth delta and delta tolerance approach showed better results. Besides, choosing futures together with ETFs as hedging underlying can increase the VaR for better risk management. Practical implications This paper offers a new method for volatility arbitrage in Chinese financial market. Originality/value This paper researches the profitability of the volatility arbitrage strategy on ETF 50 options using volatility cones method for the first time. This method has advantage over the point-wise estimation such as GARCH model and stochastic volatility model.

Mitigating risk incentives by issuing convertible bonds: A refinement to the Black–Scholes evaluation model

2014 ◽  
Vol 01 (03) ◽  
pp. 1450024
Author(s):  
Masatoshi Miyake ◽  
Mei Yu ◽  
Hiroshi Inoue
Keyword(s):  
Evaluation Model ◽  
Agency Cost ◽  
Convertible Bonds ◽  
Convertible Bond ◽  
Numerical Examples ◽  
Investment Projects ◽  
Black Scholes ◽  
Incentive Conflict ◽  
Pricing Theory ◽  
Option Pricing Theory

This study employs option pricing theory to analyze the risk incentive conflict between shareholders and creditors. It evaluates the volatility of investment projects funded by borrowed money and compares their gains for the shareholder and creditor. Our analysis is based on the recognition that shareholders' and creditors' objectives may differ. We identify the shareholder's risk incentive as a source of agency cost originating with the shareholder and find that issuing a convertible bond avoids agency cost without diluting existing shareholders' ownership. Numerical examples are shown to examine it.

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.

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