A Study On Theoretical Pricing Model And Numerical Analysis Of Contingent Convertible Bond

Contingent convertible bond is a financial derivative formulated after the financialcrisis in2008. Since it can keep deterioration of financial crisis within limits, thisconception attracted the worldwide concern and discussion of international society andwas admired by many supervision organizations as soon as it was put forward. However,analysis of the articles and value of market participants is not profound enough andrelevant theoretical study is still in the starting stage due to short period of itsdevelopment. Under such a circumstance, we are about to discuss the theoretical pricingmodels of contingent convertible bond in this paper so as to provide a certain referencefor innovation of contingent convertible bond and financial products that are still in theearly stage of development.Firstly, we reviewed studies on contingent convertible bond at home and abroad inthis paper, and then we analyzed value of contingent convertible bond and resolved itinto difference of common bond value and American put option value after related itsproperties were introduced. We computed common bond value through discount of cashflow. As for option value, we selected the most appropriate method to compute it aftercomparing American option values figured out respectively by means of Binary TreeMethod, Approximate Method of Quadratic Equation and Improvement of ApproximateMethod of Quadratic Equation. And later the total value of contingent convertible bondwas determined.Secondly, we made a numerical compute analysis of contingent convertible bondby using the model obtained in last chapter. While China Merchants Bank in securitymarket was regarded as an issuer in plan, corresponding variables were gainedaccording to situation of security market, and then value of contingent convertible bondwas figured out in accordance with the model in this paper. Eventually, it is theconclusion of this paper including summary of the paper and prospect of future studydirections.The paper’s innovation lies in compute of American option value and we employedtraditional Binary Three Method. Additionally, we tried Approximate Method ofQuadratic Equation that had been seldom used—BAW Method, but the latter has a fixeddeficiency. Hence we improved it through improvement of some parameters based on BAW. We finished matlab program of the above three methods and then compared them,thus getting an appropriate method to gain American option value. Meanwhile, in theaspect of volatility estimation of stock returns, we adopted GARCH model andMaximum Likelihood Method to revise volatility model in this paper and apply it topricing of contingent convertible bond based on traditional Estimation Method ofHistorical Data.