• Equity Derivatives

    Improved analytical proxy formulas for convertible bonds

    In a previous article, we derived a sharp analytical lower bound for the price of a convertible bond. When a soft call covenant was present, a lower bound could only be derived in a simple credit-equity model, and two simplifying assumptions were made: (1) the soft call right may be executed at any time, starting at time t=0, and (2) the bond and its underlying equity are denominated in the same currency. This addendum summarizes the necessary adjustments to the formula in order to get rid of these restrictive assumptions.

     

     

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