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Sep 18

Numerical valuation of convertible bonds

Posted by abiao at 13:16 | Code » C++ | Comments(0) | Reads(19651)
A Convertible Bond (CB) is a hybrid derivative with complex embedded features, it allows the holder to convert the bond to a certain shares (conversion ratio) of stock issued by the same company at a prescribed stock price (conversion price), besides this feature, CB normally has embedded American call (put) option which allows the bond issuer (holder) to call (sell) back the CB from holder (to issuer) at a pre-decided call (put) price once the underlying stock price is above (below) strike price for a certain prescribed, consecutive time, hereafter called Parisian option; in Asian markets, CB also has a refix clause which allows the bond issuer to reset the conversion price, under several stock price scenarios; as a hybrid product with equity and fixed income characteristics, CB is under default risk, both stochastic interest rate and stochastic volatility play a role for its valuation; etc,.

The convertible bond calculator uses a binomial lattice with the stock price as the only state variable to analyse convertible bonds with call and put features. The software does not use the warrant valuation approach which requires the volatility of equity (stocks plus warrants). Instead, it ignores the dilution effect and uses stock price volatility which is more readily available.
download at http://www.iimahd.ernet.in/~jrvarma/software/ecb.zip
online convertible bonds calculator http://www.iimahd.ernet.in/~jrvarma/software/convertible.php, more are at http://www.iimahd.ernet.in/~jrvarma/software.php.

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