Pricing And Risk Management Of Convertible Bonds In China

The global convertible bond market is mainly in some developed countries and areas such as American, Japan, Europe and some Asian countries. The convertible bond market develops with high speed in American, Japan, Europe and Southeast Asia, which played a positive role in enhancing the competitiveness of enterprises and the degree of financial market prosperity in these countries. Convertible bonds are no longer an edge or exotic financial products, what’s more is to enter the mainstream of the capital market. Issuing convertible bonds has become one of the important ways of financing.China’s convertible bond market is not mature. Most companies that issue bonds and investors of convertible bond have little knowledge about the theoretical price and the whole risk of convertible bond, which will cause great financial risks, and even cause great loss of financial market in china. So in a range of financial activities involving convertible bonds, it is very necessary to acquire sufficient knowledge of the theoretical price and the whole risk about convertible bond.First of all, this paper makes a comprehensive analysis on the connotation and characteristics of convertible bonds, and sampling process contract terms, which determine the key idea of convertible bond pricing. This paper find the factors that affect the prices of convertible bond lies in the conversion premium, the adjustment of conversion price, the call provisions and the put provisions. So all factors need to be considered in the process of pricing.In the second place, this paper compares the Monte Carlo Simulation and Trinomial Tree Model, and Monte Carlo Simulation is finally determined as the pricing method of this paper. Followed by GREE convertible bond as an example, an empirical analysis of convertible bond pricing is done through Monte Carlo Simulation. Through the hypothesis test of the model results, it is proved that there is no significant difference between the model and the real price of GREE convertible bond.On the basis, this paper introduces the measurement of the risk with Greece, and further introduces the VaR(Value at Risk) to describe the whole risk of convertible bond. Combining the pricing and risk management of convertible bond, the basic development process and key technologies are detailed from conversion of Yield to Maturity to Spot Rate, cash flow mapping and Cholesky decomposition, this paper continues to construct a VaR calculating model,operative VaR calculating process through Monte Carlo Simulation.Ultimately, an empirical analysis of VaR about convertible bond is done still by GREE convertible bond as an example. And then checked the results with the review test, which is mainly Failure-Rate test and Likelihood-Ratio test.