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Decomposing and valuing callable convertible bonds: a new method based on exotic options

Author

Listed:
  • Zhou, Qi-Yuan
  • Wu, Chong-Feng
  • Feng, Yun

Abstract

In 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.

Suggested Citation

  • Zhou, Qi-Yuan & Wu, Chong-Feng & Feng, Yun, 2007. "Decomposing and valuing callable convertible bonds: a new method based on exotic options," MPRA Paper 7421, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:7421
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Callable convertible bonds; Equivalent decomposition; Up-and-out calls; American binary calls; Derivative pricing;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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