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By the martingale theory and transformation of probability measures, this paper obtains the analytical solution of the price of the convertible bond whose conversion price may reset at a predetermined time. The interest rate here follows an extended Vasicek model. In the numerical result, we find that the Monte Carlo method is efficient. Numerical result also shows that the correlated coefficient...
This article presents a trinomial tree model for pricing zero-coupon convertible bonds (CBs) subject to equity, market and default risk. Interest rates are assumed to follow a mean-reverting square root process. Equity prices prior to default are modeled as a constant elasticity of variance (CEV) process, which is capable of reproducing the volatility smile observed in the empirical data. Based on...
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