Implicit Trigger Price Determination for Contingent Convertible Bond

Abstract

In this paper we provide concrete evaluations for the trigger price that causes the conversion of Convertible Contingent (CoCo) bond contracts.In particular we exploit prices for CoCo bonds traded in real financial markets and the values obtained by the credit derivative as well as by the equity derivative method, to determine the associated implicit trigger price. Because of the computational characteristics of the proposed approaches, we also provide related algorithms.

A BSDE with Delayed Generator Approach to Pricing under Counterparty Risk and Collateralization

“…In particular, the wrong estimation of credit default risk that, at different levels, has been experienced at the end of the last decade is intrinsically linked to the inadequacy of classical models in describing real financial markets, mainly because of the unrealistic hypotheses of the existence of a unique risk-free rate, that is, the theoretical rate of return of an investment with zero risk, or the possibility of having unlimited access to funding. Our aim is to derive a mathematical formulation of such problems, while we refer the interested reader to, for example, [9,10] and references therein, for a deep study of related financial implications; see also [11], where the credit risk is studied in connection with the so-called Catastrophe Bonds, [12] where the default probability problem for credit risk is considered, [13] which concerns a large deviation approach, and [14] where related trigger prices determination for convertible contingent bonds is treated.…”