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Callable barrier reverse convertible securities

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  • Jerome Detemple
  • Yerkin Kitapbayev

Abstract

We study the valuation of callable barrier reverse convertible contracts written on one or two underlying asset prices. We assume the issuer of the contract can call early redemption at any time during a pre-specified time interval. We identify the optimal redemption policy and show, in the single underlying asset case, it is characterized by a time-dependent boundary. The boundary satisfies a nonlinear integral equation of the Volterra type. When there are two underlying assets, the boundary is a surface depending on one price in addition to time. Valuation formulas and associated integral equations are derived. Numerical experiments are performed.

Suggested Citation

  • Jerome Detemple & Yerkin Kitapbayev, 2021. "Callable barrier reverse convertible securities," Quantitative Finance, Taylor & Francis Journals, vol. 21(9), pages 1519-1532, September.
    • Handle: RePEc:taf:quantf:v:21:y:2021:i:9:p:1519-1532
    DOI: 10.1080/14697688.2021.1912380
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