ERIC C. K. YU () (London Diversified Fund Management, 3rd Floor, 10 Grosvenor Street, London, W1K 4QB, UK) WILLIAM T. SHAW () (Department of Mathematics, King's College London, The Strand, London, WC2R 2LS, UK)
Abstract
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 BlackâScholes 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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.