Valuing resettable convertible bonds: Based on path decomposing

Yun Feng, Bing-hua Huang and Yu Huang

Finance Research Letters, 2016, vol. 19, issue C, 279-290

Abstract: We price resettable convertible bonds (RCBs) whose embedded options contain conversion, call and put provisions and reset clause using complete path decomposition. The reset clause stipulates that the conversion price is adjusted downwards if the underlying stock price is lower than the conversion price by some pre-specified percentage. By assuming or identifying optimal strategies of RCBs’ issuers and investors, we completely decompose the value of RCBs into three parts: A sum of values of several path-dependent exotic options, the value of coupon payments, and the par value. Our method provides comprehensible insight of different provisions contained in RCBs.

Keywords: Convertible bonds; Reset clause; Path decomposition (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:19:y:2016:i:c:p:279-290

DOI: 10.1016/j.frl.2016.09.002

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