Percs, Decs, and Other Mandatory Convertibles

Arzac, Enrique R.

doi:10.1111/j.1745-6622.1997.tb00125.x

Cited by 20 publications

(21 citation statements)

References 2 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…3 Credit spread and historical volatility were proved to be cointegrated processes, for most CBs, using two residual-based tests (P u and P z ) proposed by Phillips and Ouliaris. 4 The average error of the model using credit spread based on historical volatility was 4.12 per cent. It is especially important that the only market information used for the model was current underlying share prices.…”

Section: Resumementioning

confidence: 99%

“…In 2002 there were approximately $270 billion convertibles outstanding, $500 billion in 2003, 1 $600 billion in 2004 2 and, by our estimation, reached $700 billion in 2006. The continued expansion and diversity of contractual features of convertibles including different types of call clauses, with or without a hurdle, option to change the conversion ratio, 3 clauses that restrict the conversion right of holders to contingent events (CoCo clause, conversion based on stock price, CoCoCB clause, conversion based on trading price condition), mandatory clauses, 4 perpetual feature 5 and others make convertibles a challenging instrument to price.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

The pricing of convertible bonds within the Tsiveriotis and Fernandes framework with exogenous credit spread: Empirical analysis

Gushchin¹,

Curien²

2008

J Deriv Hedge Funds

View full text Add to dashboard Cite

Victor Gushchin has an MS in Mathematics and Applied Mathematics and a PhD in Economics from Moscow State University. He is currently employed as Manager of the Financial Model Validation and QA Front Office teams for Sophis Technology Ireland. In this post, he is also responsible for developing and validating pricing models for convertible bonds and providing assistance to hedge funds in this respect.Erwan Curien was educated in mathematics and physics (Ecole Polytechnique, France, 1998), specialising in finance and statistics (ENSAE, 2001). He is currently employed as the manager of the Quantitative Research team for Sophis Technology France. In this post, he is also responsible for developing models for convertible bonds. He has published several articles on convertible bonds and credit derivatives. Practical applicationsOwing to its relative simplicity and its ability to incorporate the main characteristics of convertibles that have limited market data, the Tsiveriotis and Fernandes framework is widely used by practitioners for pricing convertible bonds. In our research, we addressed the most important unanswered question regarding the Tsiveriotis and Fernandes framework; does the framework provide accurate and practical valuation consistent with the market? We conducted what we believe is the most extensive empirical research on the subject and found that using a moving-average credit spread results in a valuation that is consistent with the market. The existence of a continuous credit spread that can be used to achieve accurate pricing establishes solid practical grounds for the hedging strategy based on historical implied credit spread that is used by many hedge funds. The co-integration of historical volatility and credit spread described in the article makes it possible, in many cases, to price convertibles without complete market information. Practical advice and examples are provided. AbstractDespite a huge popularity of convertible bonds and a variety of different pricing models, very little empirical research on their valuation has been undertaken. This paper investigates the pricing performance of arguably the most popular among practitioners, the Tsiveriotis and Fernandes approach implemented within a trinomial-tree model with exogenous credit spread using daily market prices on the largest available historical database (B1500 CBs). We demonstrate that using a constant credit spread within that framework would lead to significant mispricing in average. By contrast, we present a practical approach for valuing convertible bonds with moving-average credit spread, which leads to acceptable results. We prove that historical volatility and implied credit spread are cointegrated for the majority of bonds in our sample. This allows us to model credit spread based on cointegrated relationship with volatility and extend our model to the cases with limited market information available. The mispricing is proven to be statistically insignificant in the researched convertible bonds.

show abstract

Section: Resumementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

The pricing of convertible bonds within the Tsiveriotis and Fernandes framework with exogenous credit spread: Empirical analysis

Gushchin¹,

Curien²

2008

J Deriv Hedge Funds

View full text Add to dashboard Cite

show abstract

“…Section 5 concludes the paper. Finnerty (1988), Arzac (1999) and Smithson and Chew (1999) posit that innovations in the debt securities add value through their abilities to reallocate risk to investors that are better prepared to manage it, reduce agency costs, reduce transaction costs, reduce taxes, complete the market by meeting special investor needs, or reduce information asymmetries. While hybrid securities involve one or more option features, most empirical studies focus on analysis of one specific feature.…”

Section: Introductionmentioning

confidence: 99%

An empirical analysis of the determinants and pricing of corporate bond clawbacks

Daniels

Ejara

Vijayakumar

2009

Journal of Corporate Finance

View full text Add to dashboard Cite

“…There are several types of MCNs, (Arzac 1997), but all of them share some characteristics: a predetermined coupon regularly paid and common stock conversion at redemption with one or two conversion ratios that transform the initial notional into a limited number of shares. Due to market appetite, historical and fiscal reasons, the typical MCN has two conversion triggers, hence two conversion ratios, the lower conversion ratio and the upper conversion ratio.…”

Section: Pricing Modelmentioning

confidence: 99%

Mandatory Convertible Bonds as an Efficient Method of Issuing Capital

Huerga

Rodríguez‐Monroy

2018

Lecture Notes in Management and Industrial Engineering

View full text Add to dashboard Cite

Abstract. Mandatory Convertibles Notes (MCNs) mean only a small fraction of all the securities issued by corporate or financial institutions, however, they represent nearly a 30% in volume of the convertible securities issued every year. MCNs share characteristics of equity and debt securities but rating agencies assign them a high equity component and are commonly treated as equity by accounting standards. Despite the high facial coupon that MCNs seem to pay, a deeper analysis shows that the cost of MCN can be lower than the cost of issuing hybrid or subordinated debt and in some cases similar to the cost of issuing senior debt. Mandatory convertibles were profusely issued by financial institutions amid the global crisis as a means to increase capital and could be considered as a predecessor of some types of AT1 and Contingent Convertible. The academic literature about Mandatory Convertibles is scarce and we consider necessary to shed some light on a type of security that can be very useful for the real economy

show abstract

Percs, Decs, and Other Mandatory Convertibles

Cited by 20 publications

References 2 publications

The pricing of convertible bonds within the Tsiveriotis and Fernandes framework with exogenous credit spread: Empirical analysis

The pricing of convertible bonds within the Tsiveriotis and Fernandes framework with exogenous credit spread: Empirical analysis

An empirical analysis of the determinants and pricing of corporate bond clawbacks

Mandatory Convertible Bonds as an Efficient Method of Issuing Capital

Contact Info

Product

Resources

About