Decomposing and valuing callable convertible bonds: a new method based on exotic options
AbstractIn the framework of Black-Scholes-Merton option pricing models, by employing exotic options instead of plain options or warrants, this paper presents an equivalent decomposition method for usual Callable Convertible Bonds (CCB). Furthermore, the analytic valuation formulae for CCB are worked out by using the analytic formulae for those simpler securities decomposed from CCB. Moreover, this method is validated by comparing with Monte Carlo simulation. Besides, the effects of call clauses, coupon clauses and soft call condition clauses are analyzed respectively. These give lots of new insights into the valuation and analysis of CCB and much help to hedge their risks.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 7421.
Date of creation: 16 Feb 2007
Date of revision:
Callable convertible bonds; Equivalent decomposition; Up-and-out calls; American binary calls; Derivative pricing;
Find related papers by JEL classification:
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-08 (All new papers)
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