Convertible Bonds in a Defaultable Diffusion Model
Tomasz Bielecki , Stephane Crepey , Monique Jeanblanc , Marek Rutkowski
AbstractIn this paper, we study convertible securities (CS) in a primary market model consisting of: a savings account, a stock underlying a CS, and an associated CDS contract (or, alternatively to the latter, a rolling CDS more realistically used as an hedging instrument). We model the dynamics of these three securities in terms of Markovian diffusion set-up with default. In this model, we show that a doubly reflected Backward Stochastic Differential Equation associated with a CS has a solution, meaning that super-hedging of the arbitrage value of a convertible security is feasible in the present set-up for both issuer and holder at the same initial cost, and we provide the related (super-)hedging strategies.
|Book||Stochastic Analysis with Financial Applications, Progress in Probability, vol. 65, 2011, ISBN 978-3-0348-0096-9|
|Citation count*||0 (2015-05-30)|
* presented citation count is obtained through Internet information analysis and it is close to the number calculated by the Publish or Perish system.