Title: Close form pricing formulas for Coupon Cancellable CoCos
Authors: CORCUERA José ManuelDE SPIEGELEER JanFAJARDO JoséJOENSSON BENGT HENRIK BREDVADSCHOUTENS WimVALDIVIA Arturo
Citation: JOURNAL OF BANKING & FINANCE vol. 42 p. 339-351
Publisher: ELSEVIER SCIENCE BV
Publication Year: 2014
JRC N°: JRC80482
ISSN: 0378-4266
URI: http://www.sciencedirect.com/science/article/pii/S0378426614000399
http://publications.jrc.ec.europa.eu/repository/handle/JRC80482
DOI: 10.1016/j.jbankfin.2014.01.025
Type: Articles in periodicals and books
Abstract: Contingent Convertibles (‘‘CoCos’’) are contingent capital instruments which convert into shares, or have a principal write down, if a trigger event takes place. CoCos exhibit the undesirable so-called death-spiral effect: by actively hedging the equity risk, investors can (unintentionally) force the conversion by making the share price deteriorate and eventually trigger the conversion. In this paper we introduce and analyse Coupon Cancellable CoCos (‘‘CoCa CoCos’’), a new type of CoCo where coupons can be cancelled during the lifetime of the note. We provide closed-form pricing formulas for CoCa CoCos, we study the impact of coupon cancellations in the price of the bond and we show that death-spiral effect is reduced.
JRC Directorate:Space, Security and Migration

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