Abstract
In this paper we obtain some formulas for pricing contingent convertibles subject to what we call extension risk, i.e., the possibility that the bond issuer does not buy back the bond at pre-specified call dates. We follow a structural approach and we address the finite and infinite maturity cases.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
By a lower Snell envelope of a discrete time \(\mathbb {F}\)-adapted process \(X:=\left( X_{i}\right) _{i=1}^{N}\), we understand the minus Snell envelope of \(-X.\) See, for instance, Sect. 2.2 in [14] for the definition of the Snell envelope of a process and its relationship with the problem of optimal stopping.
References
Basel Committe on Banking Supervision. Basel III: A global regulatory framework for more resilient banks and banking systems. Bank for International Settlements (2010)
Black, F., Scholes, M.: The pricing of options and corporate liabilities. J. Polit. Econ. 81, 637–654 (1973)
Brigo, D., Garcia, J., Pede, N.: Coco bonds valuation with equity and credit-calibrated first fassage structural models. Preprint (2013)
Chen, N., Glasserman, P., Nouri, B., Pelger, M.: CoCos, bail-in, and tail risk. OFR Working paper. U.S. Department of the Treasury (2013)
Cheridito, P., Xu, Z.: A reduced form CoCo model with deterministic conversion intensity. Preprint (2013)
Cheridito, P., Xu, Z.: Pricing and hedging CoCos. Preprint (2013)
Commission of Experts.: Final report of the commission of experts for limiting the economic risks posed by large companies. Technical report, Swiss National Bank (2010)
Corcuera, J.M., Fajardo, J., Schoutens, W., Jonsson, H., Spiegeleer, J., Valdivia, A.: Close form pricing formulas for coupon cancellable CoCos. J. Bank. Finance 42, 339–351 (2014)
De Spiegeleer, J., Schoutens, W.: Pricing contingent convertibles: a derivatives approach. J. Deriv. 20(2), 27–36 (2012)
De Spiegeleer, J., Schoutens, W.: Multiple trigger CoCos: contingent debt without death spiral risk. Financ. Markets Inst. Instrum. J. 22(2), 129–141 (2013)
De Spiegeleer, J., Schoutens, W.: Coco bonds with extension risk. Wilmott 71, 78–91 (2014)
De Spiegeleer, J., Van Hulle, C., Schoutens, W.: The Handbook of Hybrid Securities: Convertible Bonds. CoCo Bonds and Bail-In. The Wiley Finance Series (2014)
European Banking Authority.: Buffer convertible capital securities—final termsheet. Technical report (2011)
Lamberton, D., Lapeyre, B.: Introduction to Stochastic Calculus Applied to Finance. Financial Mathematics Series. Chapman & Hall/CRC (2007)
Musiela, M., Rutkowski, M.: Martingale Methods in Financial Modelling. Applications of Mathematics (New York), vol. 36. Springer, Berlin (1997)
Peskir, G., Shiryaev, A.N.: Optimal Stopping and Free-Boundary Problems. Lectures in Mathematics. ETH Zurich. Birkhauser, Basel (2006)
Yu, P., Van Luu, B.: Lessons from the collapse in hybrid bank capital securities. Int. J. Manage. Pract. 5(2), 125–148 (2012)
Acknowledgments
The work of J.M. Corcuera is supported by the Grant of the Spanish MCINN MTM2013-40782. This research was partially carried out at CAS—Centre for Advanced Study at the Norwegian Academy of Science and Letters, Research group SEFE. J. Fajardo thanks financial support from CNPQ, grant 471131/2013-0.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2016 Springer International Publishing Switzerland
About this chapter
Cite this chapter
Corcuera, J.M., Fajardo, J., Schoutens, W., Valdivia, A. (2016). CoCos with Extension Risk. A Structural Approach. In: Podolskij, M., Stelzer, R., Thorbjørnsen, S., Veraart, A. (eds) The Fascination of Probability, Statistics and their Applications. Springer, Cham. https://doi.org/10.1007/978-3-319-25826-3_21
Download citation
DOI: https://doi.org/10.1007/978-3-319-25826-3_21
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-25824-9
Online ISBN: 978-3-319-25826-3
eBook Packages: Mathematics and StatisticsMathematics and Statistics (R0)