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Convertible Bonds with Higher Loan Rate: Model, Valuation, and Optimal Strategy

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  • Haiyang Wang
  • Zhen Wu

Abstract

We study the pricing problem for convertible bonds via backward stochastic differential equations (BSDEs). By virtue of reflected BSDEs and Malliavin derivatives, we establish the formulae for the fair price of convertible bonds and the hedging portfolio strategy explicitly. We also obtain the optimal conversion time when there is no dividends‐paying for underlying common stocks. Furthermore, we consider the case that the loan rate is higher than riskless interest rate in a financial market, and conclude that it does not affect the price of convertible bonds actually. To illustrate our results, some numerical simulations are given and discussed at last.

Suggested Citation

  • Haiyang Wang & Zhen Wu, 2014. "Convertible Bonds with Higher Loan Rate: Model, Valuation, and Optimal Strategy," Abstract and Applied Analysis, John Wiley & Sons, vol. 2014(1).
    • Handle: RePEc:wly:jnlaaa:v:2014:y:2014:i:1:n:341519
    DOI: 10.1155/2014/341519
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    References listed on IDEAS

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