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Pricing and Hedging Mandatory Convertible BondsManuel AmmannUniversity of St. Gallen - Swiss Institute of Banking and Finance Ralf SeizUniversity of St. Gallen - Swiss Institute of Banking and Finance Journal of Derivatives, Vol. 13, No. 3, pp. 30-46, Spring 2006 Abstract: This article examines the pricing and hedging of mandatory convertible bonds on the US market using daily market prices for a period of 498 trading days resulting in a sample of over 14,600 daily price observations. We explore the pricing and hedging performance based on a simple contingent claims model. On average, the pricing errors are lower than those found for standard convertible bonds. An analysis of the hedging performance of the model indicates that the model is useful for hedging as, on average, the hedging errors observed are relatively small and mostly unsystematic.
Keywords: mandatory convertibles, hybrid securities, convertible bonds JEL Classification: G12, G13, G15 Accepted Paper SeriesDate posted: May 19, 2006Suggested CitationContact Information
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