Steering a Bank Around a Death Spiral: Multiple Trigger CoCos
16 Pages Posted: 26 Dec 2011
Date Written: December 10, 2011
In this paper we start with the introduction of two pricing models to value contingent convertibles. One model ("rule of thumb") has its roots in credit derivatives pricing while the second model implements an equity derivatives approach. From these models we then quantify the equity sensitivity and the negative gamma resulting from the design of a contingent convertible and illustrate the possible pitfalls of a death spiral on the share price. We conclude that moving away from one large single CoCo issue towards more but smaller issues with accounting triggers spread across an extended range, will alleviate the death spiral risk.
Keywords: Contingent Capital, CoCo, Death Spiral
JEL Classification: G12, G13, G18, G21, G28, G32
Suggested Citation: Suggested Citation