Call Option on CB -Structure and Pricing

• Main Authors: Lai Hsiao-Wei, 賴曉薇
• Other Authors: Gang Shyy
• Format: Others
• Language: en_US
• Published: 2002
• Online Access: http://ndltd.ncl.edu.tw/handle/10871832361651074607

碩士 === 國立中央大學 === 財務金融研究所 === 90 === This paper investigates call option pricing of the stripping of convertible bonds into equity component and debt component. We introduce the asset swap business structure and corresponding transaction contracts. In addition, we use a Least-Square Monte Carlo simulation approach to price call option on CB with three state variables, stock price, risk-free interest rate, and credit risk. From the sensitivity analysis, we found three interesting issues. One is a call on CB with low initial credit rating is relatively valuable comparing to CB value in excess of strike price 100, which represents Intrinsic Value of call on CB. It indicates that holding a call on CB has opportunity to take advantage of equity but not take loss of bankruptcy. Another is that the setting of yield to put of CB will significantly influence the inclination toward holding CB or buying a call on CB for investors. A call on CB is relatively valuable when put price of CB is low. The other is that the equity features of call option will be more notable as the interest rate is higher. The value of a call on CB apparently increases as the risk-free interest rate increases while its Intrinsic Value decreases. Our simulation concludes that the CB call option will be mostly affected by (1) issuer credit (2) put price (3) interest rate level.