Valuation of Convertible Bond Asset Swap

• Main Authors: Yi-Feng Chen, 陳怡鳳
• Other Authors: 李存修
• Format: Others
• Language: zh-TW
• Published: 2018
• Online Access: http://ndltd.ncl.edu.tw/handle/63b9p9

碩士 === 國立臺灣大學 === 財務金融學研究所 === 106 === A convertible bond is a cocktail of different risk components, which are a source of potential risk and return. The market risk of convertible can be roughly spilt into two main parts: an equity component and a credit one. The credit part can be associated with the value of bond, and the equity part creates the equity exposure and the convexity. The construction of a convertible asset swap involves an extra counterparty bringing the buyer and seller of the credit together. The seller wants to eliminate the credit risk of convertible, and the transaction between the intermediary and the credit seller covers the ascot. While the transaction between the buyer of the credit and the intermediary is an asset swap. The right to halt or recall the asset swap is held by the credit seller. An ascot is an American option and the buyer can exercise the deal and get the underlying convertible bond, and the early exercise of the option may happen when credit spreads tighten. This kind of product is on the over-the-counter(OTC) market and therefore not very standardized. The ascot belongs to the large family of compound options, which are options on other options and is hard to price the fair value. This study includes the introduction of Taiwan convertible bond market, literature review of various valuation methods, and try to construct a multi-factor model to price an ascot. The numerical method we use here is least-square Monte Carlo simulation, and there are three stochastic factors, such as risk-free rate, volatility and stock. Apart from the assumption of risk-free rate, we also estimate the credit spread amount by the TCRI index, which is released by the database TEJ. After the construction of ascot valuation, we conduct the sensitivity analysis for different risk factors.