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Pricing contingent convertibles: a general framework for application in practice

Buergi, Markus

In: Financial Markets and Portfolio Management, 2013, vol. 27, no. 1, p. 31-63

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    Titre
    • Pricing contingent convertibles: a general framework for application in practice
    Auteur
    • Buergi, Markus. Department of Banking and Finance, University of Zurich, Pattenstrasse 14, 8032, Zurich, Switzerland
    Type de document
    • Postprint
    Langue
    • Anglais
    Publié dans
    • Financial Markets and Portfolio Management, 2013, vol. 27, no. 1, p. 31-63. Springer US; http://www.springer-ny.com
    Autre version électronique
    Identifiant OAI-PMH
    • oai:doc.rero.ch:322129
    Summary
    The first contingent convertibles (CoCo) were issued in 2009, but, to date, the academic community has not given much attention to practical issues of pricing them. Combining various aspects from existing theoretical and practical literature, this paper first presents a CoCo pricing framework that allows a flexible and comprehensible valuation of real-world equity or TIER-1 ratio-triggered CoCos. The model is based on the assumption that the issuer's total asset value follows a Brownian motion, that book values reflect fair economic values in the case of financial distress, and that there is a linear relationship between straight equity and TIER-1 ratios. The pricing methodology is then applied to the Credit Suisse Buffer Capital Note issued in February 2011