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Studies On Pricing Of The Chinese Convertible Bond

Posted on:2006-08-22Degree:MasterType:Thesis
Country:ChinaCandidate:F JiFull Text:PDF
GTID:2166360152492831Subject:Probability theory and mathematical statistics
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The convertible bond is a kind of financial derivative, which is finely devised and whose holder has the right of converting the bond into common stocks issued by the corporation within specified time period. It has become a major instrument for fund-raising and investing in the security market all over the world till now. The convertible bond is beneficial to the investor, to the corporation and to the development of the whole security market.To begin with, in Chapter 2, the author introduced the definition, basic elements as a kind of bond and corresponding clauses of convertible bond, then the author introduced the character and analyzed the general value discipline of convertible bonds at the same time.In Chapter 3, the author began to analyze the pricing of the convertible bond. Because the convertible bond is one derivative product compounded of a stock option and a bond, the method of pricing it complies with the general way of pricing the derivative securities. In the paper, referring the pricing model of LYON which is a one-factor(stock price) pricing model, the author revised it according to the actual character of the convertible bond issued in Chinese security market, set up a pricing model for the Chinese convertible bond and derived it in the theory. In solving partial differential equation(i.e. pricing model), the author adopted the finite difference method to get its numerical solution. Considering the speed of numerical calculation, explicit finite difference method is adopted; Because the author took stock log price as a underlying variable of differential equation, the numerical solutions from explicit FDM necessarily converges to PDE's analytical solutions.In Chapter 4, the author gave an example of pricing the convertible bond on the basis of shanghai airport convertible bond. The result shows that it is feasible to price the Chinese convertible bond using the adopted LYON pricing model. The author still gave an explanation to the difference between the theory price and the actual price. Finally, the author analyzed the impacts of each parameter, call provision and put provision on the value of the convertible bond.In addition, because the price of convertible bond is very sensitive to the volatility of stock, the author discussed two kinds of stock volatility(i.e. constant volatility and time-varying volatility) and their estimating methods in the paper. The latter consists of arithmetic and weighting schemes. Here the author presented two widely-used weighted volatility models: EWMA and GARCH(1,1), which are better in all historical volatility models. But GARCH(1,1) model can reflect long-run average phenomenon of volatility. As stock volatility in pricing model of convertible bonds should be long-run average value and stock volatility will decline after issuing convertible bond, the author estimated the long-run average volatility by means of GARCH(1,1) model basing on historical prices before issuing of stock and then made an adjustment. As to the estimating process of GARCH(1,1) model, the author adopted Maximum Likelihood Estimation and BHHH algorithm to get unknown parameters' value.The research of this paper helps to know the basic compositions and special clauses, to make a reference of pricing for the investor, as well as to carry on the decision of designing clause for the company.
Keywords/Search Tags:convertible bond, Black-Scholes pricing theory of options, explicit finite difference method, stock price volatility, EWMA model, GARCH(1,1) model, Maximum Likelihood Estimate
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