The Research On Pricing By Using B-S Model And Arbitrage Of Convertible Bonds

Convertible bonds are kinds of special corporate bonds which combine both bond properties and stock option. With the development of Chinese capital market, convertible bonds are increasingly favored by investors and listing corporation. As a kind of complex financial derivatives, the theory of convertible bonds have been the focus of academic research. In this paper we mainly study the pricing and arbitrage of convertible bonds.Firstly, we give an introduce of the convertible bonds’ research background and significance, explain the definition and the basic terms of convertible bonds, review the development process of Chinese convertible bonds market and analysis of convertible bonds for the significance of Chinese securities market. We believe that the market price and the theoretical price of convertible bonds is consistent or not and whether there is a large amount of convertible bond arbitrage opportunity is an important basis for the inspection efficiency of convertible bond market.Then, we analyze the value structure of the convertible bonds. We believe that the theoretical price of convertible bonds is combined with net bonds price and option price. The net bonds price can be figured out by future discounted cash flow method, and the option price can be figured out by Black-Scholes option pricing model. The empirical study shows that in bear market convertible bonds are undervalued, especially those just startup convertible bonds are significantly underestimated.Next, we introduce the arbitrage model of convertible bonds and the simple arbitrage strategy of later-day arbitrage and intraday arbitrage. The empirical study shows in bull market there aren’t arbitrage opportunities. While in bear market there are a large number of arbitrage opportunities especially when the convertible bonds are in the redemption period, and later-day arbitrage have idealer success rate and return but intraday arbitrage have more arbitrage opportunities.The empirical results show that the convertible bonds market price is significantly undervalued and there are a large number of arbitrage opportunities. Therefore, Chinese convertible bond market is not an effective market and still need to be developing.