TY - JOUR
AU - Coonjobeharry, Radha Krishn
AU - Behera, Dhiren Kumar
AU - Thakoor, Nawdha
PY - 2024/01/02
Y2 - 2024/11/13
TI - Numerical PDE-Based Pricing of Convertible Bonds Under Two-Factor Models
JF - Contemporary Mathematics
JA - Contemp. Math.
VL - 5
IS - 1
SE - Research Article
DO - 10.37256/cm.5120243343
UR - https://ojs.wiserpub.com/index.php/CM/article/view/3343
SP - 93-104
AB - <p>Convertible bonds are popular financial instruments by which firms raise capital. Owing to the various features of such bonds, especially the early-exercise call, put, and conversion provisions, they can be valued by numerical techniques only. The price of a convertible bond is driven by both the underlying stock price and the interest rate, and these two factors are correlated. Under the partial differential equation framework, a two-dimensional convection-diffusion-reaction equation containing a mixed derivative must be solved. In this work, we employ an Alternating-Direction-Implicit method, namely the Craig-Sneyd scheme to solve the two-factor pricing equation. Comparison against the commonly employed Crank-Nicolson method shows the merit of the scheme. Besides, we analyze how the different contractual features of a convertible bond affect its price.</p>
ER -