Pricing Of Convertible Bonds And Empirical Analysis

Convertible bond is a complex financial derivative. With considerable scale indomestic capital markets, it has become an important investment tool. So, it is of greatimportance to find a suitable pricing approach to convertible bonds. Terms ofconvertible bonds are analyzed in this article, and common option pricing methods suchas Binomial Trees Model and Monte Carlo simulation are used to price the convertiblebonds in domestic markets.Firstly, we give a brief introduction of convertible bond and its general terms. Afterthe analysis of its components of the value, we recognize that a convertible bond can beregarded as a common bond with a call option, a sale-back option and a redemptionoption embedded in it. The main factors affecting its price are the price and volatility ofthe underlying, risk free rate and credit risk rate.Secondly, several common option pricing methods are expounded. By analyzingthe characters of these pricing methods and convertible bonds, we find the results ofBinomial Trees Model can be close to real price and it is a good reference. However, itis impossible to change the conversion price for Binomial Trees Model while mostconvertible bonds contain the special downward revision term. So the results ofBinomial Trees Model may underestimate the real price. Therefore, Monte Carlosimulation is a more suitable and practical approach.At last, we do some empirical analysis of domestic convertible bonds market. Wechoose the closing price of9typical convertible bonds in domestic market from April1st,2013to April26th,2013as our study object and use the methods mentioned aboveto obtain theoretical price of convertible bonds. The results show that there is littledifference between market price and theoretical price on the whole. Most convertiblebonds are not overestimated or underestimate evidently, except Gonghang convertiblebond, in which there exists some arbitrage space under the condition of short sale.