CoCo Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models
Pricing of Securities
2013-02-28 v1
Abstract
After the beginning of the credit and liquidity crisis, financial institutions have been considering creating a convertible-bond type contract focusing on Capital. Under the terms of this contract, a bond is converted into equity if the authorities deem the institution to be under-capitalized. This paper discusses this Contingent Capital (or Coco) bond instrument and presents a pricing methodology based on firm value models. The model is calibrated to readily available market data. A stress test of model parameters is illustrated to account for potential model risk. Finally, a brief overview of how the instrument performs is presented.
Cite
@article{arxiv.1302.6629,
title = {CoCo Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models},
author = {Damiano Brigo and João Garcia and Nicola Pede},
journal= {arXiv preprint arXiv:1302.6629},
year = {2013}
}