Close Form Pricing Formulas for CoCa CoCos

18 Pages Posted: 25 Jan 2013

See all articles by José Manuel Corcuera

José Manuel Corcuera

University of Barcelona

José Fajardo

Getulio Vargas Foundation

Henrik Jonsson

European Commission - Joint Research Centre

Wim Schoutens

KU Leuven - Department of Mathematics

Arturo Valdivia

University of Barcelona

Date Written: January 24, 2013

Abstract

Contingent Convertibles ("CoCos") are contingent capital instruments which convert into shares, or have a principal write down, if a trigger event takes place. CoCos exhibit the undesirable so-called "death-spiral effect": by actively hedging the equity risk, investors can (unintentionally) force the conversion by making the share price deteriorate and eventually trigger the conversion.

In this paper we introduce and analyse Coupon Cancellable CoCos ("CoCa CoCos"), a new type of CoCo where coupons can be cancelled during the lifetime of the note. We provide closed form pricing formulas for CoCa CoCos, and we show that death-spiral effect is reduced.

Keywords: Contingent Convertibles, Credit Risk, Structural Approach, First Passage Times

JEL Classification: G11, G12, G13, G18, G21, G32

Suggested Citation

Corcuera, José Manuel and Fajardo, José and Jonsson, Henrik and Schoutens, Wim and Valdivia, Arturo, Close Form Pricing Formulas for CoCa CoCos (January 24, 2013). Available at SSRN: https://ssrn.com/abstract=2206493 or http://dx.doi.org/10.2139/ssrn.2206493

José Manuel Corcuera

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

José Fajardo

Getulio Vargas Foundation ( email )

Brazil
55213799 5781 (Phone)

HOME PAGE: http://www.josefajardo.com

Henrik Jonsson

European Commission - Joint Research Centre ( email )

Via E. Fermi 2749
Ispra (VA), 21027
Italy

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Arturo Valdivia (Contact Author)

University of Barcelona ( email )

585 Gran Via de les Corts Catalanes
Barcelona, 08007
Spain

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