Titre : | Market Implied Pricing and Hedging of Hybrid Financial Instruments |
Auteurs : | Jan De spiegeleer |
Type de document : | Books |
Editeur : | Leuven : KUL Department of Mathematics, 2013 |
Article en page(s) : | 247 p. |
Collection : | Statistics Section |
Langues: | Anglais |
Index. décimale : | 332.632 |
Tags : | Financial instruments ; Financial risk management |
Résumé : | At the outset of the doctoral program, the emphasis of our efforts was on convertible bond valuationand hedging. The overall idea was to investigate if an improvement in thisparticular domain was feasible. It was our ambition to work out a valuation modelfor convertible bonds away from the traditional and popular jump-diffusionmodels used by most convertible bond analysts. The diffusion part of thestochastic process was hereby removed while we kept the jump component into themodel. We replaced the diffusion part of the share price process with aConstant Elasticity of Variance (CEV) process. This resulted in a so-calledJump-Extended Constant Elasticity of Variance model (JDCEV) that wassubsequently implemented using a generalized trinomial tree. The implementationof the JDCEV approach has been illustrated through several numerical examples. Thefocus of our research changed early 2010. The expansion of the topic was drivenby the first issue of a contingent convertible (CoCo bond) in December 2009. Financialinstitutions around the world, were indeed being challenged by theirregulators. Banks were forced to include loss absorbing bonds in theirregulatory capital. CoCo bonds possess this loss absorbing property since theyautomatically convert into shares or suffer a write down if the financialstability of the banks weakens. This thesis describes this new asset class, itsanatomy, the regulatory background and the possible advantages and disadvantageof contingent convertibles. We particularly quantify the death-spiral effectwhich puts a constraint on the amount of CoCo bonds a bank can issue. In thiswork, we develop a closed form formula to price contingent convertibles in aBlack-Scholes framework. In a second step, we combine the JDCEV model and thegeneralized trinomial tree method to price CoCo bonds. Moreover, the sameapproach facilitates the numerical study of contingent convertibles with anoptional conversion (CoCoCo). This instrument was issued for the first time in2011 by the Bank of Cyprus. The JDCEV model has been instrumental in modelinghybrids because it allows us to price these securities in a context where theparameters of the model are calibrated against real market data (listed optionsand credit default swaps). Most of our initial work was done in a single factorcontext. The only source of risk was the price of the underlying shares. Asensitivity analysis which we combined with empirical data, convinced us toprice convertible bonds and CoCos in a multi-factor context. Both interestrates and default intensities are now stand-alone stochastic processes. Theimplementation is no longer done through a lattice method but using a MonteCarlo simulation that allows for early exercises, investor puts, issuer calls,etc... |
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Code-barres | Cote | Support | Localisation | Section | Disponibilité |
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301806 | 332.632 SPI M | Book | Royal Military Academy | Bibliothèque ERM | Disponible |