Pricing contingent convertibles: a general framework for application in practice

The first contingent convertibles (CoCo) were issued in 2009, but, to date, the academic community has not given much attention to practical issues of pricing them. Combining various aspects from existing theoretical and practical literature, this paper first presents a CoCo pricing framework that allows a flexible and comprehensible valuation of real-world equity or TIER-1 ratio-triggered CoCos. The model is based on the assumption that the issuer’s total asset value follows a Brownian motion, that book values reflect fair economic values in the case of financial distress, and that there is a linear relationship between straight equity and TIER-1 ratios. The pricing methodology is then applied to the Credit Suisse Buffer Capital Note issued in February 2011.