ANALYTIC PRICING OF CoCo BONDS

Colin Turfus () and Alexander Shubert ()
Additional contact information
Colin Turfus: Deutsche Bank, 1 Great Winchester Street, London EC2N 2DB, United Kingdom
Alexander Shubert: J. P. Morgan, 25 Bank Street, London E14 5JP, United Kingdom

International Journal of Theoretical and Applied Finance (IJTAF), 2017, vol. 20, issue 05, 1-26

Abstract: We present a new model for pricing contingent convertible (CoCo) bonds which facilitates the calculation of equity, credit and interest rate risk sensitivities. We assume a lognormal equity process and a Hull–White (normal) short rate process for the conversion intensity with a downward jump in the equity price on conversion. We are able to derive an approximate solution in closed form based on the assumption that the conversion intensity volatility is asymptotically small. The simple first-order approximation is seen to be accurate for a wide range of market conditions, although particularly for longer maturities higher order terms in the asymptotic expansion may be needed.

Keywords: Contingent convertible bond; CoCo bond; jump-diffusion process; closed-form analytic solution; asymptotic expansion; perturbation analysis; equity-credit hybrid (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024917500340

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