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The Valuation Of Callable-Puttable Reverse Convertible Bonds

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  • KYOKO YAGI

    (Center for Advanced Research in Finance, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan)

  • KATSUSHIGE SAWAKI

    (Graduate School of Business Administration, Nanzan University, 18 Yamazato-cho, Showa-ku, Nagoya, Aichi, 466-8673, Japan)

Abstract

Many companies issue some complex structured bonds. A reverse convertible bond is one of such structured bonds. In this paper we consider a valuation model of callable-puttable reverse convertible bonds which have the complex payoff in a setting of the optimal stopping problem between the issuer and the investor. Reverse convertible bonds issued by a company can be exchanged for the shares of another company. We analyze the pricing of reverse convertible bonds with call and put clauses and explore analytical properties of the value of the reverse convertible bond and optimal call and put boundaries by the issuer and the investor, respectively. Furthermore, we investigate how the call and put clauses affect the value and the optimal strategies for both of them.

Suggested Citation

  • Kyoko Yagi & Katsushige Sawaki, 2010. "The Valuation Of Callable-Puttable Reverse Convertible Bonds," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 27(02), pages 189-209.
    • Handle: RePEc:wsi:apjorx:v:27:y:2010:i:02:n:s0217595910002636
    DOI: 10.1142/S0217595910002636
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    References listed on IDEAS

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    1. Marta Szymanowska & Jenke Ter Horst & Chris Veld, 2009. "Reverse convertible bonds analyzed," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(10), pages 895-919, October.
    2. Marco Realdon, 2004. "Valuation Of Exchangeable Convertible Bonds," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(06), pages 701-721.
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    Cited by:

    1. Yuri Kifer, 2012. "Dynkin Games and Israeli Options," Papers 1209.1791, arXiv.org.
    2. Sha Lin & Song‐Ping Zhu, 2022. "Pricing callable–puttable convertible bonds with an integral equation approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(10), pages 1856-1911, October.
    3. Kim, Byung-June & Jang, Bong-Gyu, 2021. "Convertible bond valuation with regime switching," Chaos, Solitons & Fractals, Elsevier, vol. 150(C).
    4. Xiaoyu Tan & Zili Zhang & Xuejun Zhao & Shuyi Wang, 2022. "DeepPricing: pricing convertible bonds based on financial time-series generative adversarial networks," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-38, December.
    5. Jonathan A. Batten & Karren Lee-Hwei Khaw & Martin R. Young, 2014. "Convertible Bond Pricing Models," Journal of Economic Surveys, Wiley Blackwell, vol. 28(5), pages 775-803, December.

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