THE VALUATION OF CALLABLE-PUTTABLE REVERSE CONVERTIBLE BONDS

Kyoko Yagi () and Katsushige Sawaki ()
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Kyoko Yagi: Center for Advanced Research in Finance, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
Katsushige Sawaki: Graduate School of Business Administration, Nanzan University, 18 Yamazato-cho, Showa-ku, Nagoya, Aichi, 466-8673, Japan

Asia-Pacific Journal of Operational Research (APJOR), 2010, vol. 27, issue 02, 189-209

Abstract: Many companies issue some complex structured bonds. A reverse convertible bond is one of such structured bonds. In this paper we consider a valuation model of callable-puttable reverse convertible bonds which have the complex payoff in a setting of the optimal stopping problem between the issuer and the investor. Reverse convertible bonds issued by a company can be exchanged for the shares of another company. We analyze the pricing of reverse convertible bonds with call and put clauses and explore analytical properties of the value of the reverse convertible bond and optimal call and put boundaries by the issuer and the investor, respectively. Furthermore, we investigate how the call and put clauses affect the value and the optimal strategies for both of them.

Keywords: Reverse convertible bonds; optimal stopping; optimal boundaries; puttable security (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0217595910002636

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