Callable barrier reverse convertible securities

Jerome Detemple and Yerkin Kitapbayev

Quantitative Finance, 2021, vol. 21, issue 9, 1519-1532

Abstract: We study the valuation of callable barrier reverse convertible contracts written on one or two underlying asset prices. We assume the issuer of the contract can call early redemption at any time during a pre-specified time interval. We identify the optimal redemption policy and show, in the single underlying asset case, it is characterized by a time-dependent boundary. The boundary satisfies a nonlinear integral equation of the Volterra type. When there are two underlying assets, the boundary is a surface depending on one price in addition to time. Valuation formulas and associated integral equations are derived. Numerical experiments are performed.

Date: 2021
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DOI: 10.1080/14697688.2021.1912380

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