Rethinking Valuation and Pricing Models

4

An “Economical” Pricing Model for Hybrid Products

Rosa Cocozza and Antonio De Simone

Università degli Studi di Napoli Federico II

Chapter Outline

4.1 Introduction

4.2 Pricing Convertible Bonds

4.2.1 Optimal conversion strategy

4.2.2 Optimal call strategy

4.2.3 Basic model

4.3 Two-Factor Numerical Procedure

4.3.1 Interest rate modeling

4.3.2 Stock price dynamics under a stochastic interest rate

4.4 Default Risk

4.5 Pricing Convertible Bonds Subject to Interest Rate Risk and Default Risk

4.6 Conclusion

4.7 Note

References

4.1 Introduction

Convertible bonds are hybrid products very common in the financial industry. A fundamental role played by such securities is to provide funding for firms at lower costs with respect to other financial contracts, ...