An analytical approximation for convertible bonds

Joanna Goard

doi:10.21914/anziamj.v64.16740

Authors

Joanna Goard University of Wollongong https://orcid.org/0000-0002-3950-7867

DOI:

https://doi.org/10.21914/anziamj.v64.16740

Keywords:

convertible bonds, analytical approximations, optimal conversion price, free boundary problems

Abstract

This paper looks at adapting the method of Medvedev and Scaillet for pricing short-term American options to evaluate short-term convertible bonds. However unlike their method, we provide explicit formulae for the coefficients of our series solution. This means that we do not need to solve complicated recursive systems, and can efficiently provide fast solutions. We also compare the method with numerical solutions, and find that it performs extremely well, giving accurate bond prices as well as accurate optimal conversion prices.

doi:10.1017/S1446181122000062

Author Biography

Joanna Goard, University of Wollongong

School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, NSW Australia.