Convertible Bond Pricer

[Yan He]

Hi, just curious, what is the best model to price Convertibles? Say, if I use Crank Nicolson, how can I deal with the constraints at each time step? Or what's the popular tool as pricer ? :dance::dance:

 

[John]

Hi, just curious, what is the best model to price Convertibles? Say, if I use Crank Nicolson, how can I deal with the constraints at each time step? Or what's the popular tool as pricer ? :dance::dance:

here's a CB model that I have done for a class a while ago. It was based on Nick Calamos' book. It is a simple binomial tree model with credit-adjusted discount rates. As stock price drops, the discount rate increases accordingly. For more details check out this book.

 

[Yan He]

John, thank you for the reply. This really comes in handy.

 

[Binoux]

Does anyone know any model to price dual binary options? Thanks for any help that comes my way.

Binoux

 

[pardasani]

Hi, just curious, what is the best model to price Convertibles? Say, if I use Crank Nicolson, how can I deal with the constraints at each time step? Or what's the popular tool as pricer ? :dance::dance:

I know Prof Derman has a old paper on pricing convertible bonds via binomial methods (easy to read/ understand and with intuitive reasoning for the results)

Here is a link to the pdf
http://www.ederman.com/new/docs/gs-valuing_convertibles.pdf

It also uses credit spreads which vary on the tree, so maybe similar to the other method John mentioned !

 

[Jaco]

Thanx for the post John! Really helped me understand convertible bonds.

 

[tigergb]

for pricing CB by finite difference, i recommend the paper http://www.cs.toronto.edu/pub/reports/na/lucy-05-msc.pdf , where psor is used to deal with American boundary constraints;

for sample lattice tree to price CB, here are some codes Tags：convertible bond - Quantitative Finance Code Index

 

[BORIKA]

Convertible bond tree

Dear quant community,

I would like to implement the Hung and Wang model: (a two factor equity, int rate ) in order to price a Convertible Bond. Since I have only a mathematical background, (no finance, no programming) I don't know how to implement the model: I did it with "normal" excel but my goal is to use VBA to extend the nb of steps.

Do you recommend a book which could help me succeed in this task? Do you know any sources which could be of interest for this project?

Many thanks in advance

 

[volguy]

Hi,

Thanks for the .xls

What are or is the most popular pricing model(s) for convertible bonds currently used on trading desks?

 

[cmrm]

This paper shows you how to price convertibles correctly
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2400101