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Valuing resettable convertible bonds: Based on path decomposing

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  • Feng, Yun
  • Huang, Bing-hua
  • Huang, Yu

Abstract

We price resettable convertible bonds (RCBs) whose embedded options contain conversion, call and put provisions and reset clause using complete path decomposition. The reset clause stipulates that the conversion price is adjusted downwards if the underlying stock price is lower than the conversion price by some pre-specified percentage. By assuming or identifying optimal strategies of RCBs’ issuers and investors, we completely decompose the value of RCBs into three parts: A sum of values of several path-dependent exotic options, the value of coupon payments, and the par value. Our method provides comprehensible insight of different provisions contained in RCBs.

Suggested Citation

  • Feng, Yun & Huang, Bing-hua & Huang, Yu, 2016. "Valuing resettable convertible bonds: Based on path decomposing," Finance Research Letters, Elsevier, vol. 19(C), pages 279-290.
    • Handle: RePEc:eee:finlet:v:19:y:2016:i:c:p:279-290
    DOI: 10.1016/j.frl.2016.09.002
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    More about this item

    Keywords

    Convertible bonds; Reset clause; Path decomposition;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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