(1) Department of Mathematics, National University of Singapore, Singapore, Singapore;(2) Department of Mathematics, Hong Kong University of Science and Technology, Hong Kong, China
Abstract:
When an American warrant or a convertible bond is called by its issuer, the holder is usually given a notice period to decide
whether to sell the derivative back to the issuer at the call price or to exercise the conversion right. Several earlier papers
have shown that such notice period requirement may substantially affect the optimal call policy adopted by the issuer. In
this paper, we perform theoretical studies on the impact of the notice period requirement on issuer’s optimal call policy
for American warrants and convertible bonds. We also examine how the optimal call policy of the issuer interacts with holder’s
optimal conversion policy.