An 'Economical' Pricing Model for Hybrid Products
Posted: 11 Feb 2015
Date Written: February 10, 2013
In this chapter, we propose, after a brief review of the convertible bond pricing theory, an innovative numerical procedure that can efficiently be adopted with the aim of pricing convertibles. Such a procedure accounts for two sources of risk: The stock price and the spot interest rate. More precisely, we assume that the stock price dynamics is described by the Cox–Ross–Rubinstein (Cox et al., 1979) binomial model under a stochastic risk-free rate, whose dynamics evolves over time according to the Black–Derman–Toy (Black et al., 1990) one-factor model.
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