Pricing Contingent Convertibles: <i>A Derivatives Approach</i>

Spiegeleer, Jan De; Schoutens, Wim

doi:10.3905/jod.2012.20.2.027

Cited by 61 publications

(36 citation statements)

References 4 publications

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“…The credit derivatives method forged by De Spiegeleer and Schoutens (2012) uses this relation to approximate a CoCo's value.…”

Section: Credit Derivatives Methodsmentioning

confidence: 99%

“…The equity derivatives model is another market-based approach proposed by De Spiegeleer and Schoutens (2012). Starting with CDS spreads, CoCo price and share price together with their implied volatilities market quotations, we solve for the threshold stock price value (S * ), corresponding with the issuer's CET1 ratio trigger level.…”

Section: Equity Derivatives Methodsmentioning

confidence: 99%

“…With respect to the division between structural (Penacchi, 2011) and intensity approaches (market implied models), the latter category includes credit derivatives and equity derivatives models (De Spiegeleer and Schoutens, 2012).…”

Section: Introductionmentioning

confidence: 99%

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Hybrid Securities

Liberadzki

2016

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Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world.Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978-1-349-88780-4 ISBN 978-1-137-58971-2 (eBook)This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin.A catalogue record for this book is available from the British Library.Softcover reprint of the hardcover 1st edition 2016 978-1-137-58970-5

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“…The credit derivatives method forged by De Spiegeleer and Schoutens (2012) uses this relation to approximate a CoCo's value.…”

Section: Credit Derivatives Methodsmentioning

confidence: 99%

Section: Equity Derivatives Methodsmentioning

confidence: 99%

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Hybrid Securities

Liberadzki

2016

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“…That the coupon stream stops on the trigger event, is not taken into account at all. In earlier work (De Spiegeleer & Schoutens, Pricing Contingent Convertibles: A Derivatives Approach, 2012), we developed a closed form solution that also deals with the loss of the coupons upon the arrival of the trigger. This method makes use of barrier options under the typical Black‐Scholes assumptions.…”

Section: Negative Convexitymentioning

confidence: 99%

Multiple Trigger CoCos: Contingent Debt Without Death Spiral Risk

Spiegeleer¹,

Schoutens²

2013

Financial Market

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This paper starts with the observation that the average issue size during 2012 of contingent convertible (CoCo) bonds was more than $1 bn. Typically a CoCo is converted into shares when a pre-defined capital ratio such as the core tier 1 ratio (CT1) drops below a minimum level. In some other cases, the contingent convertibles investors will suffer from a predefined haircut instead of a conversion into shares. Investors could dynamically hedge the equity exposure embedded within a contingent convertible by taking an offsetting short position in the underlying shares. This dynamic hedging can in some circumstances have a negative impact on the share price of the bank. It could indeed lead to a spiral of falling share prices. This so-called death spiral effect can only be avoided if the size of the contingent convertible is moderate compared to the amount of outstanding public traded shares. In this contribution we advocate the use of contingent debt where there is more than one conversion trigger. Banks should move away from one large single CoCo issue towards issues with multiple accounting triggers spread across an extended range. This will alleviate the death spiral risk. The expected dynamic behavior of a CoCo bond has been modeled using a credit derivates approach. From these models we then quantify the equity sensitivity and the negative gamma resulting from the design of a contingent convertible and illustrate the possible pitfalls of a death spiral on the share price.

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“…A CoCo offers neither limited downside protection, nor an unlimited upside gain and is automatically converted to equity when the issuer reaches a prespecified level of financial distress. The investor has to absorb the loss from converting into cheap shares (De Spiegeleer and Schoutens, ). If the conversion trigger is not met a CoCo can be redeemed at maturity similar to a normal bond (Zahres, ).…”

Section: Introductionmentioning

confidence: 99%

Convertible Bond Pricing Models

Batten

Khaw

Young

2013

Journal of Economic Surveys

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Abstract. Convertible bonds are an important segment of the corporate bond market, with worldwide outstandings approaching US$235 billion. Simple pricing models value a convertible bond as being equivalent to a straight bond with an embedded option that enables the bond holder to convert to a specific amount of common stock. The straight bond is subject to both interest rate and credit risk, whereas the option to convert is dependent on the underlying stock price, which exposes the convertible bond holder to equity risk. The complexity of these features means that convertible bonds tend to be treated casually in major derivatives and corporate finance textbooks. This paper presents a survey of the theoretical and empirical aspects of convertible bond pricing. The limitations of these studies are highlighted to identify those areas of research that may improve the valuation process and facilitate the application of these securities for corporate financing.

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Pricing Contingent Convertibles: A Derivatives Approach

Cited by 61 publications

References 4 publications

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Multiple Trigger CoCos: Contingent Debt Without Death Spiral Risk

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