Download or read book The Impact of Skew on the Pricing of Coco Bonds written by Jan De Spiegeleer and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a Heston-based pricing model for contingent convertible bonds (CoCos). The main finding is that skew in the implied volatility surface has a significant impact on the CoCo price. Hence stochastic volatility models, like the Heston model, which incorporate smile and skew are appropriate in the context of pricing CoCos.The financial crisis of 2007-2008 triggered an avalanche of financial worries for financial institutions around the globe. After the collapse of Lehman Brothers, governments intervened and bailed out banks using tax-payer's money. Preventing such bail-outs in the future and designing a more stable banking sector in general, requires both higher capital levels and regulatory capital of a higher quality. Bank debt needed therefore to be made absorbing. This is where CoCos come in. The Lloyds Banking Group introduced the first CoCo bonds as early as December 2009. Since then a lot of other banks followed Lloyds and the market of CoCos, currently around $70bn, is expanding very rapidly.CoCos are hybrid financial instruments that convert into equity or suffer a write-down of the face value upon the appearance of a trigger event, often in terms of the bank's CET1 level in combination with a regulatory trigger. The valuation of CoCos boils down to the quantification of the trigger probability and the expected loss suffered by the investors if such a trigger event eventually takes place. There are at least two schools of thought regarding valuation of CoCos. Structural models can be put at work or investors can rely on market implied models. The latter category uses market data (share prices, CDS levels and implied volatility, ...) in order to calculate the theoretical price of a CoCo bond. In De Spiegeleer & Schoutens (2012a), the pricing of CoCo notes has been worked out in a market implied Black-Scholes context.In this paper we move away from the assumption of a constant volatility which is the back-bone of Black-Scholes based valuation and put the Heston model at work and study CoCos in a stochastic volatility context. The existence of a semi closed-form formula for European options pricing under the Heston model allows for a fast calibration of the model. In our approach we combined market quotes of listed option prices with CDS data. As a case study, the procedure was applied on the Tier 2 10NC CoCo issued by Barclays in 2012.

Download or read book The Risk Management of Contingent Convertible CoCo Bonds written by Jan De Spiegeleer and published by Springer. This book was released on 2018-11-02 with total page 106 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides an overview of the risk components of CoCo bonds. CoCos are hybrid financial instruments that convert into equity or suffer a write-down of the face value upon the appearance of a trigger event. The loss-absorption mechanism is automatically enforced either via the breaching of a particular accounting ratio, typically in terms of the Common Equity Tier 1 (CET1) ratio, or via a regulatory trigger. CoCos are non-standardised instruments with different loss-absorption and trigger mechanisms. They might also contain additional features such as the cancellation of coupon payments. Different pricing models are discussed in detail. These models use market data such as share prices, CDS levels and implied volatility in order to calculate the theoretical price of a CoCo bond and its sensitivities, providing the investor with insides to hedge from adverse changes in the market conditions. The audience are professionals as well as academics who want to learn how to risk manage CoCo bonds using cutting edge techniques as well as all the risk involved in CoCo bonds.

Download or read book Innovations in Derivatives Markets written by Kathrin Glau and published by Springer. This book was released on 2016-12-02 with total page 446 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book presents 20 peer-reviewed chapters on current aspects of derivatives markets and derivative pricing. The contributions, written by leading researchers in the field as well as experienced authors from the financial industry, present the state of the art in: • Modeling counterparty credit risk: credit valuation adjustment, debit valuation adjustment, funding valuation adjustment, and wrong way risk. • Pricing and hedging in fixed-income markets and multi-curve interest-rate modeling. • Recent developments concerning contingent convertible bonds, the measuring of basis spreads, and the modeling of implied correlations. The recent financial crisis has cast tremendous doubts on the classical view on derivative pricing. Now, counterparty credit risk and liquidity issues are integral aspects of a prudent valuation procedure and the reference interest rates are represented by a multitude of curves according to their different periods and maturities. A panel discussion included in the book (featuring Damiano Brigo, Christian Fries, John Hull, and Daniel Sommer) on the foundations of modeling and pricing in the presence of counterparty credit risk provides intriguing insights on the debate.

Download or read book The Impact of a New Coco Issuance on the Price Performance of Outstanding Cocos written by Jan De Spiegeleer and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we investigate the price performance of outstanding CoCos after a new CoCo issue is announced by the same issuer. Contingent Convertible bonds or CoCo bonds are new hybrid capital instruments that have a loss absorbing capacity which is enforced either automatically via the breaching of a particular CET1 level or via a regulatory trigger.When an issuer has already some CoCos outstanding and is announcing the issuance of a new CoCo bond, there are at least two opposite forces at work. On one hand, a new issue means that the capital of the issuing institute is strengthened (at the Additional Tier 1 or Tier 2 level). On the other hand, there are the market dynamics and investors often prefer to be rather invested in the new CoCo than in the older ones. We estimate the price impact on the outstanding CoCos via two methods. The first method basically compares the returns of the outstanding CoCo bonds after an announcement of a new issue with some overall CoCo indices. This method however does not take into account idiosyncratic movements and basically compares with the general market trend. A second model-based method, compares the actual market performance of the outstanding CoCo bonds, with a theoretical model performance taking into account idiosyncratic effects, like movements in the underlying stock, credit default spreads or volatilities.In total, we investigate 24 cases of new CoCo bond issues. The main conclusion of the investigation is that there is a moderated negative effect on outstanding CoCo bonds. This is confirmed by both methodologies and the impact is on average an underperformance of about 25 bps to 50 bps in between the announcement date and the issue date.

Download or read book The Handbook of Hybrid Securities written by Jan De Spiegeleer and published by John Wiley & Sons. This book was released on 2014-08-06 with total page 421 pages. Available in PDF, EPUB and Kindle. Book excerpt: Introducing a revolutionary new quantitative approach to hybrid securities valuation and risk management To an equity trader they are shares. For the trader at the fixed income desk, they are bonds (after all, they pay coupons, so what's the problem?). They are hybrid securities. Neither equity nor debt, they possess characteristics of both, and carry unique risks that cannot be ignored, but are often woefully misunderstood. The first and only book of its kind, The Handbook of Hybrid Securities dispels the many myths and misconceptions about hybrid securities and arms you with a quantitative, practical approach to dealing with them from a valuation and risk management point of view. Describes a unique, quantitative approach to hybrid valuation and risk management that uses new structural and multi-factor models Provides strategies for the full range of hybrid asset classes, including convertible bonds, preferreds, trust preferreds, contingent convertibles, bonds labeled "additional Tier 1," and more Offers an expert review of current regulatory climate regarding hybrids, globally, and explores likely political developments and their potential impact on the hybrid market The most up-to-date, in-depth book on the subject, this is a valuable working resource for traders, analysts and risk managers, and a indispensable reference for regulators

Download or read book Analytic Pricing of CoCo Bonds written by Colin Turfus and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a new model for pricing contingent convertible (CoCo) bonds which facilitates the calculation of equity, credit and interest rate risk sensitivities. We assume a lognormal equity process and a Hull-White (normal) short rate process for the conversion intensity with a downward jump in the equity price on conversion. We are able to derive an approximate solution in closed form based on the assumption that the conversion intensity volatility is asymptotically small. The simple first-order approximation is seen to be accurate for a wide range of market conditions, although particularly for longer maturities higher order terms in the asymptotic expansion may be needed.

Download or read book Contingent Convertible CoCo Bonds written by Sascha Wilkens and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: With several banks issuing substantial amounts of contingent convertible (“coco”) bonds since 2009 this paper is the first to analyse empirically the suitability of selected pricing models that have been proposed for this kind of instrument. The analysis of coco bond issues by major banks shows that all tested approaches - a structural, an equity derivatives and a credit derivatives model - are largely able to fit observed coco bond prices. Regarding the derivation of hedge ratios, however, all models are found to exhibit biases. Overall, the results point to the equity derivatives model with its straightforward parameterisation and interpretation as the comparatively most promising approach for the practical pricing and risk management of coco bonds. Given the limited set of bonds and time series available for the analysis, more empirical research into the still young market is required.

Download or read book Numerical Pricing of Coco Bonds with Parisian Trigger Feature Using the Fortet Method written by Chi Man Leung and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Unlike conventional convertible bonds, contingent convertible (CoCo) bonds are converted into equity shares of the issuing bank subject to certain trigger mechanisms (accounting and/or regulatory trigger) when the issuing bank is under financial non-viable state. We consider pricing of these CoCos using the contingent claims approach, where the state variables are the stock price and Tier 1 capital ratio. We use the Parisian feature to model the regulatory trigger where equity conversion is triggered when the capital ratio stays under the non-viable state cumulatively for a certain period of time. The accounting trigger is modeled using the one-touch barrier feature associated with the capital ratio. The Parisian trigger feature adds one extra path dependent state variable in the pricing model of a CoCo bond. We design effective numerical algorithms for pricing the Coco bonds using the extended Fortet method that avoid the issuance of adding one state variable for the Parisian feature of regulatory trigger. Pricing properties of the CoCo bonds under both regulatory trigger and accounting trigger are explored.

Download or read book Mind the Conversion Risk a Theoretical Assessment of Contingent Convertible Bonds written by Gaëtan LeQuang and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Pricing of Already Issued Contingent Convertible Bonds CoCo Bonds written by Melanie Prossliner and published by . This book was released on 2013-09 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seminar paper from the year 2011 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,2, University of Innsbruck (Banking and Finance), course: Risk Management, language: English, abstract: In the year 2007 one of the biggest financial crisis in worlds history has begun. It leads to the bankruptcy of huge financial institution followed by the bailout of banks through the national government and a downturn in worldwide stock markets. The financial crisis has also shown that the capitalizations of numerous financial institutes were not adequate and several components of banks equity could not fulfil their planned function. To save the global financial system from collapsing many banks received lot of money from the government. To avoid another future crisis and huge bailouts by the national government, some financial experts and leading economists proposed a new financial instrument, called Contingent Convertibles Bonds ("CoCo-Bonds"). They are considered to be an opportunity to improve the equity base of banks in times of crisis. CoCo-Bonds are a special form of bonds, which convert automatically to equity after a predefined incidence. Three large banks have already issued these new financial instruments; The Lloyds Banking Group (2009), Rabobank (2010) and the Credit Suisse (2011). The aim of this paper is to analyse the structure and the pricing of these already issued CoCo- Bonds. In the first part the functionality of the CoCo-Bonds will be explained. It will also provide a summary of the specification of the already issued CoCo-Bonds. The third part, which is the main part, is focused on the pricing modalities of these new financial instruments. Two different approaches will be considered. First the credit derivatives approach and seconds the equity derivatives approach. In the end of the paper both approaches will be applied to the already issued CoCo-Bonds of Lloyds and Credit Suisse.

Download or read book The Effects of Contingent Convertible CoCo Bonds on Insurers Capital Requirements Under Colvency II written by Tobias Niedrig and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The Liikanen Group proposes contingent convertible (CoCo) bonds as a potential mechanism to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. We develop a stylized model with a direct financial connection between banking and insurance and study the effects of various types of bonds such as non-convertible bonds, write-down bonds and CoCos on banks' and insurers' risk situations. In addition, we compare insurers' capital requirements under the proposed Solvency II standard model as well as under an internal model that ex-ante anticipates additional risks due to possible conversion of the CoCo bond into bank shares. In order to check the robustness of our findings, we consider different CoCo designs (write-down factor, trigger value, holding time of bank shares) and compare the resulting capital requirements with those for holding non-convertible bonds. We identify situations in which insurers benefit from buying CoCo bonds due to lower capital requirements and higher coupon rates. Furthermore, our results highlight how the Solvency II standard model can mislead insurers in their CoCo investment decision due to economically irrational incentives.

Download or read book Market Analysis and Price Development of Contingent Convertible Bonds written by and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Contingent Convertible bonds are a new form of capital banks issue to meet the new capital requirements regulators put in place in response to the shortcomings revealed by the financial crisis. Besides their basic characteristic of being converted from debt to equity or written down once a stress-related predefined trigger is breached, there exist a wide variety of possible designs. We examine the latest developments in this fast-growing and quickly changing market by analyzing the recent issuances and observe the capital-based trigger level and the loss absorption mechanism as the two main design characteristics Cocos can be differentiated in practice. In the empirical part, we compare the price development of a sample of twelve Cocos with the price development of other matched debt and equity securities of the same bank, both in general and dependent on the key design elements we classified. As our analysis shows, the risk of Cocos perceived by market participants, measured by the volatility of returns, is in line with their position in the balance sheet hierarchy but we find support for the concerns that prices do not adequately reflect the true risks. Furthermore, using Pearson and Spearman correlation, we find the price development differs the most when differentiating along the capital-based trigger level. The prices of Coco bonds seem to be influenced the most by factors affecting the price development of equity since our overall results show the highest correlation between Coco returns and equity returns and the coefficients are significant. We finally identify the lack of standardization as the biggest impediment to be overcome to ensure the future growth of the Coco market.

Download or read book Manufacturing and Managing Customer Driven Derivatives written by Dong Qu and published by John Wiley & Sons. This book was released on 2016-03-21 with total page 568 pages. Available in PDF, EPUB and Kindle. Book excerpt: Manufacturing and Managing Customer-Driven Derivatives Manufacturing and Managing Customer-Driven Derivatives sheds light on customer-driven derivative products and their manufacturing process, which can prove a complicated topic for even experienced financial practitioners. This authoritative text offers up-to-date knowledge and practices across a broad range of topics that address the entire manufacturing, pricing and risk management process, including practical knowledge and industrial best practices. This resource blends quantitative and business perspectives to provide an in-depth understanding of the derivative risk management skills that are necessary to adopt in the competitive financial industry. Manufacturing and managing customer-driven derivative products have become more complex due to macro factors such as the multi-curve environments triggered by the recent financial crises, stricter regulatory requirements of consistent modelling and managing frameworks, and the need for risk/reward optimisation. Explore the fundamental components of the derivatives business, including equity derivatives, interest rates derivatives, real estate derivatives, and real life derivatives, etc. Examine the life cycle of manufacturing derivative products and practical pricing models Deep dive into a wide range of customer-driven structured derivative products, their investment or hedging payoff features and associated risk exposures Examine the implications of changing regulatory standards, which can increase costs in the banking sector Discover practical yet sophisticated product analysis, quantitative modeling, infrastructure integration, risk analysis, and hedging analysis Gain insight on how banks should handle complex derivatives products Manufacturing and Managing Customer-Driven Derivatives is an essential guide for quants, structurers, derivatives traders, risk managers, business executives, insurance industry professionals, hedge fund managers, academic lecturers, and financial math students who are interested in looking at the bigger picture of the manufacturing, pricing and risk management process of customer-driven derivative transactions.

Download or read book The Handbook of Hybrid Securities written by Jan De Spiegeleer and published by John Wiley & Sons. This book was released on 2014-05-19 with total page 421 pages. Available in PDF, EPUB and Kindle. Book excerpt: Introducing a revolutionary new quantitative approach to hybrid securities valuation and risk management To an equity trader they are shares. For the trader at the fixed income desk, they are bonds (after all, they pay coupons, so what's the problem?). They are hybrid securities. Neither equity nor debt, they possess characteristics of both, and carry unique risks that cannot be ignored, but are often woefully misunderstood. The first and only book of its kind, The Handbook of Hybrid Securities dispels the many myths and misconceptions about hybrid securities and arms you with a quantitative, practical approach to dealing with them from a valuation and risk management point of view. Describes a unique, quantitative approach to hybrid valuation and risk management that uses new structural and multi-factor models Provides strategies for the full range of hybrid asset classes, including convertible bonds, preferreds, trust preferreds, contingent convertibles, bonds labeled "additional Tier 1," and more Offers an expert review of current regulatory climate regarding hybrids, globally, and explores likely political developments and their potential impact on the hybrid market The most up-to-date, in-depth book on the subject, this is a valuable working resource for traders, analysts and risk managers, and a indispensable reference for regulators

Download or read book The Rise of Carry The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis written by Tim Lee and published by McGraw Hill Professional. This book was released on 2019-12-13 with total page 288 pages. Available in PDF, EPUB and Kindle. Book excerpt: Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy—and the meteoric rise of carry. The financial shelves are filled with books that explain how popular carry trading has become in recent years. But none has revealed just how significant a role it plays in the global economy—until now. A groundbreaking book sure to leave its mark in the canon of investing literature, The Rise of Carry explains how carry trading has virtually shaped the global economic picture—one of decaying economic growth, recurring crises, wealth disparity, and, in too many places, social and political upheaval. The authors explain how carry trades work—particularly in the currency and stock markets—and provide a compelling case for how carry trades have come to dominate the entire global business cycle. They provide thorough analyses of critical but often overlooked topics and issues, including: •The active role stock prices play in causing recessions—as opposed to the common belief that recessions cause price crashes •The real driving force behind financial asset prices •The ways that carry, volatility selling, leverage, liquidity, and profitability affect the business cycle •How positive returns to carry over time are related to market volatility—and how central bank policies have supercharged these returns Simply put, carry trading is now the primary determinant of the global business cycle—a pattern of long, steady but unspectacular expansions punctuated by catastrophic crises. The Rise of Carry provides foundational knowledge and expert insights you need to protect yourself from what have come to be common market upheavals—as well as the next major crisis.

Download or read book From Poverty to Power written by Duncan Green and published by Oxfam. This book was released on 2008 with total page 540 pages. Available in PDF, EPUB and Kindle. Book excerpt: Offers a look at the causes and effects of poverty and inequality, as well as the possible solutions. This title features research, human stories, statistics, and compelling arguments. It discusses about the world we live in and how we can make it a better place.

Download or read book Applied Conic Finance written by Dilip Madan and published by Cambridge University Press. This book was released on 2016-10-13 with total page 205 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a comprehensive introduction to the brand new theory of conic finance, also referred to as the two-price theory, which determines bid and ask prices in a consistent and fundamentally motivated manner. Whilst theories of one price classically eliminate all risk, the concept of acceptable risks is critical to the foundations of the two-price theory which sees risk elimination as typically unattainable in a modern financial economy. Practical examples and case studies provide the reader with a comprehensive introduction to the fundamentals of the theory, a variety of advanced quantitative models, and numerous real-world applications, including portfolio theory, option positioning, hedging, and trading contexts. This book offers a quantitative and practical approach for readers familiar with the basics of mathematical finance to allow them to boldly go where no quant has gone before.