RT Journal Article
SR Electronic
T1 Sharp Analytical Lower Bounds for the Price of a Convertible Bond
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 7
OP 18
DO 10.3905/jod.2018.26.2.007
VO 26
IS 2
A1 Hüttner, Amelie
A1 Mai, Jan-Frederik
YR 2018
UL http://jod.pm-research.com/content/26/2/7.abstract
AB Analytical approximations for the price of a convertible bond within defaultable Markov diffusion models are derived in this article. Because convertible bond pricing requires time-consuming finite difference or tree pricing methods in general, such proxy formulas can help to calibrate model parameters more efficiently. The derivation is based on the idea of “Europeanizing” the American conversion option of the holder. Hence, the quality of the approximations stands and falls with the value of the early conversion premium. In practice, the latter is typically close to zero, which implies that the analytical lower bounds are incredibly sharp.TOPICS: Fixed income and structured finance, options, statistical methods