Resettable Convertible Bonds:Valuation And Arbitrage

Convertible bonds are highly mixed financial derivative that can be used not only as a refinancing tool for listed companies,but also as loving investment varieties for hedge fund and institutional investors.Convertible bonds are characterized by both bonds,stocks and options,and are usually embedded in terms of options such as conversion clause,call clause,put clause and reset clause.In the classic convertible bond pricing literature,generally only consider the conversion,call and put of these three kinds of convertible bonds inward option clause,and did not discuss in detail the reset clause on the value of convertible bonds.From the past 20 years,the Chinese market issue listed convertible bonds,the vast majority of convertible bonds are included in the reset clause,it can also be called with the strike price with reset option of the convertible bonds(Resettable Convertible Bond,hereinafter referred to as RCB),the main content of the reset clause is that if the underlying stock price falls by a certain percentage and the conditions such as the downward revision trigger conditions are met,the conversion price will be resetted downward by a certain percentage,while ignoring this clause will result in an erroneous estimate of the intrinsic value of the RCB.Therefore,this thesis proposes a convertible bond theory model with RCB,and quantitatively estimates the intrinsic value of RCB value and its embedded option value,especially the reset clause,and according to RCB theoretical price,this thesis constructs the corresponding arbitrage strategy and investment strategy according to the RCB market empirical results,and excavates the investment opportunity of the market misalignment to verify the validity of the RCB theory pricing model.In this thesis,under the framework of classical continuous time and under some assumptions and constraints,this thesis analyzes the optimal strategy of RCB issuer and holder,and then discusses all possible paths of the underlying price path in detail,and comprehensively analyzes various paths,The RCB payoffs are found to be completely decomposed into three parts: the nominal value of the bonds,the present value of the coupon coupon and some exotic options,and the RCB's pricing analysis is obtained.With the aid of the theory pricing model,this thesis quantitatively calculates the interaction between RCB theory value,embedded option value and various embedded options.The results show that when the RCB is out-of-money,the value of reset option occupies an important role in all RCB embedded options' value.The existence of reset clause increases the probability of triggering of the call clause but reduces the probability of triggering of the put clause,thereby increasing the value of the call clause but reducing the value of the put clause.According to the RCB theory pricing model provided in this thesis,a total of 36 RCB trading data available for trading in the Shanghai and Shenzhen convertible bond market from the end of 2010 to the end of 2014 are selected and the appropriate actual market data are used to estimate the parameters involved in the theoretical pricing model.Python programming calculates the pricing error rate between the RCB market price and the theoretical value,and evaluates the overall market value of China's convertible bonds.The results show that the RCB value is significantly overestimated from the overall trading day sample,with an overall overvaluation of 3.41% as a whole.And compares the empirical results of the general convertible bond theory(including only the conversion terms,call terms and put terms),and finds the standard deviation and the range of the standard deviation of the absolute error rate,the average pricing error rate square sum The RCB pricing model proposed in this thesis is superior to the ordinary convertible bond pricing model,which verifies the accuracy of the RCB pricing model and the importance of reset clause.The results of regression analysis of RCB pricing error show that there is a significant positive correlation between RCB's average pricing error rate and value state,transfer premium rate and positive stock volatility(equity value related factors),residual maturity time(debt value related factors),And the average coupon rate,credit rating(the value of the relevant factors)showed a significant negative correlation.Convertible bond arbitrage strategy in the past three decades is the international hedge fund in the more popular investment strategy.The classical convertible bond arbitrage strategy is constructed by holding the convertible bonds at the same time short selling the corresponding share of the stock,aiming to find the underestimation opportunities in the convertible bond market,and the theoretical pricing model can provide the intrinsic value of the convertible bonds Therefore,this thesis uses the RCB theory pricing model in the Chinese market empirical results,combined with the convertible bond arbitrage strategy,mining market error pricing brought about by investment opportunities.Based on the empirical data of the RCB theory pricing model,this thesis constructs the actual data of 36 convertible bonds and the underlying shares,which can be traded in the Shanghai and Shenzhen markets from 2010 to 2014,and constructs different approaches and positions of the convertible bond arbitrage strategy,found that both received positive returns,the highest monthly average yield of 0.246%.This thesis also finds that there is no significant correlation between the convertible bond arbitrage strategy and the CSI 300 stock index and the return of convertible mutual fund,which shows that the convertible bond arbitrage strategy is a good alternative investment strategy.Further,this thesis also draws the empirical results of the buying undervalue-and-hold investment strategy under different trading borders and finds positive gains.Based on the empirical results of RCB theory pricing model proposed in this thesis,the arbitrage strategy and the buying undervalue-and-hold investment strategy are all positive gains,which verifies the validity and market practicability of the theoretical pricing model.Finally,this thesis also studies the effect of the conversion price reset announcement.From the cumulative average abnormal rate of return,it is found that there is a significant positive underlying stock price and RCB price effect.The crosssectional regression results show that the announcement effect of underlying stock price can be explained by the debt ratio and dilution effect.