scholarly journals Application of Nonarbitrage Pricing Model and Finite Element Numerical Solution in the Value of Convertible Bonds in the Stock Market

2021 ◽  
Vol 2021 ◽  
pp. 1-9
Author(s):  
Xiaoxiao Guo
Keyword(s):  
Finite Element ◽  
Stock Market ◽  
Numerical Solution ◽  
Binary Tree ◽  
Convertible Bonds ◽  
Convertible Bond ◽  
Pricing Model ◽  
Tree Model ◽  
Comprehensive Performance ◽  
Pricing Theory

Because of its creditor’s rights, equity, and options, convertible bonds have been developed rapidly since its emergence and have become one of the main tools in the financial market. One of the core problems of convertible bonds is pricing. The research on the pricing model of convertible bonds in China is relatively late. Most of them use foreign technologies, but they are quite different from the actual situation in China, and most of the models are characterized by a single factor. Therefore, this paper puts forward the nonarbitrage pricing model in the stock market and the application of the finite element numerical solution in the value of convertible bonds. The biggest innovation of this paper is to design a combined pricing model by using the model of nonarbitrage pricing theory and finite element numerical solution. The model combines the advantages of the nonarbitrage pricing theory and finite element numerical solution, and through the design of this paper, the model effectively improves the calculation accuracy and is suitable for most of the current market environment. While improving the comprehensive performance of the pricing model, it also simplifies the calculation methods and steps. In order to further verify the actual effect of the pricing model in this paper, the traditional binary tree model is taken as the experimental contrast object, including the comparative analysis of the market price and the theoretical price of the convertible bond, the comparative experiment of the prediction effect between the model and the binary tree model, and the analysis of the relative price error of the convertible bond. The results show that the comprehensive performance of the pricing model in this paper is significantly better than the traditional binary tree model. This study has achieved ideal results and can be widely recommended.

scholarly journals Pricing Convertible Bonds with Credit Risk under Regime Switching and Numerical Solutions

2014 ◽  
Vol 2014 ◽  
pp. 1-13
Author(s):  
Wei-Guo Zhang ◽  
Ping-Kang Liao
Keyword(s):  
Credit Risk ◽  
Regime Switching ◽  
Numerical Solutions ◽  
Dilution Effect ◽  
Convertible Bonds ◽  
Bond Pricing ◽  
Convertible Bond ◽  
Pricing Model ◽  
Black Scholes ◽  
The Impact

This paper discusses the convertible bonds pricing problem with regime switching and credit risk in the convertible bond market. We derive a Black-Scholes-type partial differential equation of convertible bonds and propose a convertible bond pricing model with boundary conditions. We explore the impact of dilution effect and debt leverage on the value of the convertible bond and also give an adjustment method. Furthermore, we present two numerical solutions for the convertible bond pricing model and prove their consistency. Finally, the pricing results by comparing the finite difference method with the trinomial tree show that the strength of the effect of regime switching on the convertible bond depends on the generator matrix or the regime switching strength.

Defaultable Binary Tree Algorithm for Convertible Bond with Finite Maturity

2011 ◽  
Vol 219-220 ◽  
pp. 165-169
Author(s):  
Lin Li ◽  
Le Le Wang
Keyword(s):  
Credit Risk ◽  
Binary Tree ◽  
Risk Measure ◽  
Convertible Bond ◽  
Pricing Model ◽  
Tree Algorithm ◽  
Dynamic Motion ◽  
Convergence Of Algorithm

The credit risk is introduced into the pricing model of convertible bond in this paper. The main results of paper have three aspects: (1) By modifying the dynamic motion of stock, a defaultable stock process is obtained in neutral risk measure, then the pricing model of convertible bond with finite maturity and credit is proposed. (2) The defaultable binary tree algorithm is proposed, and the convergence of algorithm is proved.

scholarly journals Binary Tree Pricing to Convertible Bonds with Credit Risk under Stochastic Interest Rates

2013 ◽  
Vol 2013 ◽  
pp. 1-8 ◽  
Author(s):  
Jianbo Huang ◽  
Jian Liu ◽  
Yulei Rao
Keyword(s):  
Credit Risk ◽  
Interest Rates ◽  
Stock Prices ◽  
Binary Tree ◽  
Convertible Bonds ◽  
Tree Model ◽  
Credit Risks ◽  
Derivative Instruments ◽  
Stochastic Interest ◽  
Financial Derivative

The convertible bonds usually have multiple additional provisions that make their pricing problem more difficult than straight bonds and options. This paper uses the binary tree method to model the finance market. As the underlying stock prices and the interest rates are important to the convertible bonds, we describe their dynamic processes by different binary tree. Moreover, we consider the influence of the credit risks on the convertible bonds that is described by the default rate and the recovery rate; then the two-factor binary tree model involving the credit risk is established. On the basis of the theoretical analysis, we make numerical simulation and get the pricing results when the stock prices are CRR model and the interest rates follow the constant volatility and the time-varying volatility, respectively. This model can be extended to other financial derivative instruments.

Mitigating risk incentives by issuing convertible bonds: A refinement to the Black–Scholes evaluation model

2014 ◽  
Vol 01 (03) ◽  
pp. 1450024
Author(s):  
Masatoshi Miyake ◽  
Mei Yu ◽  
Hiroshi Inoue
Keyword(s):  
Evaluation Model ◽  
Agency Cost ◽  
Convertible Bonds ◽  
Convertible Bond ◽  
Numerical Examples ◽  
Investment Projects ◽  
Black Scholes ◽  
Incentive Conflict ◽  
Pricing Theory ◽  
Option Pricing Theory

This study employs option pricing theory to analyze the risk incentive conflict between shareholders and creditors. It evaluates the volatility of investment projects funded by borrowed money and compares their gains for the shareholder and creditor. Our analysis is based on the recognition that shareholders' and creditors' objectives may differ. We identify the shareholder's risk incentive as a source of agency cost originating with the shareholder and find that issuing a convertible bond avoids agency cost without diluting existing shareholders' ownership. Numerical examples are shown to examine it.

scholarly journals Legal Protection of Conventional Bank as Mandatory Convertible Bond Holder

2019 ◽  
Vol 19 (2) ◽  
pp. 184
Author(s):  
Franciska Mifanyira Sutikno
Keyword(s):  
Stock Market ◽  
Central Bank ◽  
Legal Protection ◽  
Convertible Bonds ◽  
Money Market ◽  
Convertible Bond ◽  
Legal Entity ◽  
Legal Standing ◽  
Conventional Bank ◽  
Legal Right

Bank as legal entity has legal right to do Investment to the another party by several investment instrument in Stock Market, Money Market or another agreement. Mandatory Convertible Bond is one of Investment Instrument which has hybird characteristic of Debt and Equity based on the Central Bank Regulatio and International Mandatory Convertible Bond concept leads to the double legal standing to the Bank as the holder. The Objective of this research is to analyze the usage of  Mandatory Convertible Bonds and the protection of Bank as its holder. The result of the research are Mandatory Convertible Bond used as equity participation through debt mechanism and the protection of Bank provided by Prospectus and Trust Agreement.

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