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Pricing and Hedging Mandatory Convertible Bonds

Posted: 19 May 2006  

Manuel Ammann

University of St. Gallen - School of Finance

Ralf Seiz

University of St. Gallen - Swiss Institute of Banking and Finance

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

Suggested Citation

Ammann, Manuel and Seiz, Ralf, Pricing and Hedging Mandatory Convertible Bonds. Journal of Derivatives, Vol. 13, No. 3, pp. 30-46, Spring 2006. Available at SSRN: https://ssrn.com/abstract=903153

Manuel Ammann

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Ralf Seiz (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland

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