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Valuing callable convertible bonds: a reduced approach

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  • F. Andre-le Pogamp
  • F. Moraux

Abstract

This paper analyses the pricing of corporate callable convertible bonds. It reconciles the applicability of the reduced form approach with optimal strategies usually discussed in the structural approach. One demonstrates that some conditions causing rational voluntary conversions may be effectively neglected. The main contribution of the paper is to show that adjusted American Capped Call options well duplicate 'classical' optimal strategies. Numerical experiments are then conducted.

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  • F. Andre-le Pogamp & F. Moraux, 2004. "Valuing callable convertible bonds: a reduced approach," Applied Financial Economics, Taylor & Francis Journals, vol. 14(10), pages 743-749.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:10:p:743-749
    DOI: 10.1080/0960310042000243574
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    1. Asquith, Paul & Mullins, David W, Jr, 1991. "Convertible Debt: Corporate Call Policy and Voluntary Conversion," Journal of Finance, American Finance Association, vol. 46(4), pages 1273-1289, September.
    2. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409, World Scientific Publishing Co. Pte. Ltd..
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    4. Brennan, M J & Schwartz, Eduardo S, 1977. "Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion," Journal of Finance, American Finance Association, vol. 32(5), pages 1699-1715, December.
    5. Broadie, Mark & Detemple, Jerome, 1995. "American Capped Call Options on Dividend-Paying Assets," The Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 161-191.
    6. Franck Moraux & Patrick Navatte, 2002. "Pricing credit derivatives in credit classes frameworks," Post-Print halshs-00076642, HAL.
    7. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
    8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Florence Andre-Le Pogamp & Khalid El Badraoui, 2013. "Security Design of Callable Convertible Bonds and Issuers' External Financing Costs," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 56(1), pages 61-81.

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