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Close form pricing formulas for Coupon Cancellable CoCos
Institution:1. Universitat de Barcelona, Barcelona, Spain;2. Jabre Capital Partners, Geneva, Switzerland;3. Getulio Vargas Foundation, Rio de Janeiro, Brazil;4. European Commission, Directorate General for Competition, Brussels, Belgium;5. Catholic University of Leuven, Leuven, Belgium;6. University de Barcelona, Faculty of Mathematics, 585 Gran Via de les Corts Catalanes, E-08007 Barcelona, Spain;1. Finance Department, Carroll School of Management, Boston College, Fulton Hall 440, Chestnut Hill, MA 02467, United States;2. Finance Area, International Business School, Brandeis University, 415 South Street, Waltham, MA 02453, United States;3. Finance Area, Graduate School of Business Administration, Fordham University, 113 West 60th Street, New York, NY 10023, United States;4. School of Economics and Management, Tsinghua University, Beijing 10019, China;1. Bradford School of Management, Emm Lane, University of Bradford, Bradford BD9 4JL, UK;2. Cardiff Business School, Colum Drive, University of Cardiff, Cardiff CF10 3EU, UK;1. Kobe University, Japan;2. Nagasaki University, Japan
Abstract:Contingent Convertibles (“CoCos”) are contingent capital instruments which convert into shares, or have a principal write down, if a trigger event takes place. CoCos exhibit the undesirable so-called death-spiral effect: by actively hedging the equity risk, investors can (unintentionally) force the conversion by making the share price deteriorate and eventually trigger the conversion.In this paper we introduce and analyse Coupon Cancellable CoCos (“CoCa CoCos”), a new type of CoCo where coupons can be cancelled during the lifetime of the note. We provide closed-form pricing formulas for CoCa CoCos, we study the impact of coupon cancellations in the price of the bond and we show that death-spiral effect is reduced.
Keywords:Contingent convertibles  Credit risk  Structural approach  First passage times
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