Download or read book The Pricing of already issued Contingent Convertible Bonds CoCo Bonds written by Melanie Prossliner and published by GRIN Verlag. This book was released on 2013-01-08 with total page 29 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 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 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 Explaining the Pricing of Contingent Convertible Bonds written by Marco Mengotti and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis presents a comprehensive analysis of contingent convertible bonds. CoCo bonds automatically convert from debt to equity if a predetermined ratio of equity capital to risk-weighted assets is undercut. Since the recent financial crisis undeniably revealed that the capital requirements must be continuously adjusted to the changing circumstances in order to ensure a functional regulation, there is presently a great demand for action concerning the capital endowments of banks. Since the conversion trigger is a crucial characteristic of contingent convertible bonds, this work analyses the conversion margins for one hundred CoCo bonds since 2012 and elucidates a methodology to estimate conversion probabilities for future quarters. It is subsequently researched, whether potential coherences between the conversion margins and the observable market prices can be found. Results reveal that the observed capital ratios ought to decrease on average by about 50 percent to force a conversion. No significant correlation between correlation margins and prices can be determined. In summary this can be explained by the high conversion margins and the rather short data time series.

Download or read book Contingent Convertible Bonds Corporate Hybrid Securities and Preferred Shares written by Marcin Liberadzki and published by Springer. This book was released on 2019-06-17 with total page 229 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a comprehensive guide to the new generation of hybrid securities: subordinated and perpetual bonds with deferrable coupon first issued around 2003, and the youngest member of the hybrids family named CoCos (contingent convertibles) being a product of Basel III or European Union CRD IV regime (2014). Contingent capital constitutes a contractual recapitalization mechanism for troubled financial institutions. An increasing number of European banks have issued CoCo bonds in order to bolster their capital ratios. Following the EU pattern, CoCos issues have become increasingly popular within banks in Asia and the Pacific. The EU regulatory treatment of the contingent convertibles issued by banks and insurers together with bank bail-in instruments is at the forefront of the book. Furthermore, the book provides an overview of hybrids pricing and risk assessment approach and covers the non-voting preferred stocks as another hybrids class.

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 Contingent Convertibles Cocos A Potent Instrument For Financial Reform written by George M Von Furstenberg and published by World Scientific. This book was released on 2014-08-08 with total page 287 pages. Available in PDF, EPUB and Kindle. Book excerpt: Contingent Convertibles (CoCos) represent debt that is subject to being converted automatically into common equity under pre-specified terms of conversion if the chosen regulatory capital ratio falls to a level triggering conversion. CoCos are that subspecies of contingent capital that references regulatory (Basel III) concepts in its triggers. From 2014, trigger points are set by common equity (Common Equity Tier 1 [CET1]) in percent of risk-weighted assets [RWA] or of more complicated measures of total exposure to a variety of risks, particularly credit risk. This is the first comprehensive book on CoCos, an innovative instrument that has attracted growing attention since it was first issued in 2009.The book is mostly concerned with going-concern ‘recovery-’ rather than ‘resolution-’ CoCos, because avoiding failure and costly disruption of financial networks without government financing is the first order of business. CoCos hold a high promise of providing fully loss-absorbing equity capital when it is most needed and least available to financial institutions. Yet, having grown out of the 2007-2009 financial crisis, they are still an ‘infant’ reform instrument in many respects. Few of the instrument's design features (or even the rating, regulatory, and tax treatments) are entirely settled. This book seeks to move the discussion toward, and then past, the main decision points so that CoCos can prove their value for contingency planning and self-insurance all over the world. It is intended to increase the ability of issuers and investors to analyze and understand the different kinds of CoCos.

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 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 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 Coco Bonds as a Method of Equity Boost written by Philipp Rothe and published by GRIN Verlag. This book was released on 2023-08-04 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: Academic Paper from the year 2021 in the subject Business economics - Investment and Finance, grade: 1,7, International School Of Management, Campus Frankfurt, language: English, abstract: This term paper will start with describing some basic characteristics of Coco-Bonds and their market behaviour. This first chapter should help to understand the product itself and its features. Afterwards the basic idea behind Basel III and resulting regulations under CRD and CRR are described and linked to Coco-Bonds as a product. In the last chapter it is discussed whether and under which circumstances Coco-Bonds belong to the equity capital of a bank and thus strengthen the equity base. After the financial crisis in 2008 one of the main objectives the regulatory- and supervisory authority had, was to strengthen and increase the equity base of banks. This should ensure a better preparation for coming crises. In October 2011 the Basel Committee set the stage for a financial product, allowing it to play a ma-jor role in building up regulatory equity capital, as defined in Basel III. The product to reach the regulatory requirements are Contingent Convertible Bonds (short: Coco-Bonds). These bonds are a niche financial product which, as a result of the increasing regulatory requirements, in recent years were often issued by banks. Although these securities are issued as a bond with a fixed coupon, in case of a certain event, the Coco-Bonds are converted into equity or are written off. Due to this, Coco-Bonds often pay a high coupon rate, which could make them, especially within the currently low interest rate environment, look like an attractive investment. However a high coupon payment always means a related risk.

Download or read book Achieving Financial Stability Challenges To Prudential Regulation written by Douglas D Evanoff and published by World Scientific. This book was released on 2017-09-22 with total page 385 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Great Financial Crisis of 2007-2010 exposed the existence of significant imperfections in the financial regulatory framework that encouraged excessive risk-taking and increased system vulnerabilities. The resulting high cost of the crisis in terms of lost aggregate income and wealth, and increased unemployment has reinforced the need to improve financial stability within and across countries via changes in traditional microprudential regulation, as well as the introduction of new macroprudential regulations. Amongst the questions raised are:

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 Rocky Times written by Yasuyuki Fuchita and published by Brookings Institution Press. This book was released on 2012 with total page 233 pages. Available in PDF, EPUB and Kindle. Book excerpt: "A Brookings Institution Press and Nomura Institute of Capital Markets Research publication It has been four years since the financial crisis of 2008, and the global financial system still is experiencing malaise caused by high rates of unemployment; a lingering, unresolved supply of foreclosed properties; the deepening European debt crisis; and fear of a recurrence of the bank turmoil that brought about the Great Recession. All of these factors have led to stagnant economic growth worldwide. In Rocky Times, editors Yasuyuki Fuchita, Richard J. Herring, and Robert E. Litan bring together experts from academia and the banking sector to analyze the difficult issues surrounding troubled large financial institutions in an environment of economic uncertainty and growing public anger. Continuing the format of the previous Brookings-Nomura collaborations, Rocky Times focuses largely on developments within the United States and Japan but looks at those in other nations as well. This volume examines two broad areas: the Japanese approach to regulating financial institutions and promoting financial stability and the U.S. approach in light of the Dodd-Frank Act. Specific chapters include ""Managing Systemwide Financial Crises: Some Lessons from Japan since 1990,"" ""The Bankruptcy of Bankruptcy,"" ""The Case for Regulating the Shadow Banking System,"" ""Why and How to Design a Contingent Convertible Debt Requirement,"" and ""Governance Issues for Macroprudential Policy in Advanced Economies."" Contributors: Gavin Bingham (Systemic Policy Partnership, London), Charles W. Calomiris (Columbia Business School), Douglas J. Elliott (Brookings Institution), Kei Kodachi (Nomura Institute of Capital Markets Research), Morgan Ricks (Vanderbilt Law School)."

Download or read book An Introduction to Options Trading written by Frans de Weert and published by John Wiley & Sons. This book was released on 2011-02-15 with total page 154 pages. Available in PDF, EPUB and Kindle. Book excerpt: Explaining the theory and practice of options from scratch, this book focuses on the practical side of options trading, and deals with hedging of options and how options traders earn money by doing so. Common terms in option theory are explained and readers are shown how they relate to profit. The book gives the necessary tools to deal with options in practice and it includes mathematical formulae to lift explanations from a superficial level. Throughout the book real-life examples will illustrate why investors use option structures to satisfy their needs.

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 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.