Assessment Of Convertible Bond Risk And Factors Analysis Based On VaR

Convertible bonds are complex financial instruments and investment vehicle combining the characteristics of stocks and bonds, widely used in finance market. In China, convertible bonds came into public's eyesight gradually with developing diversified capital market. Convertible bond is a security combining the characteristics of stocks and company bonds .The convertible bond is a security that can be converted into common stock at the option of the investor at some time or go on to keeping them in hand. Hence, it is a bond with an embedded option where the option is granted to the investor. Moreover, the convertible bond is a complex bond because the value of the bond will depend on both how interest rates change and how changes in the market price of the stock affects the value of the option to convert to common stock. Convertible bonds value includes bonds value and option value. The fluctuation of convertible bonds value in the market is complex. It is influenced by many factors, such as the situation of the company, convert price, interest rates, convertible bonds item and so on .But in short time, the fluctuation of convertible bonds value only depends on the fluctuation of option value. Then the risk of convertible bonds focuses on the option of it.Convertible bond as a security combining the characteristics of stocks and bonds, its risk is complex. We concluded five aspects, such as issue risk, convertible risk, market risk, liquidity risk and other risk. Thereby, the risk of convertible bond is difficult to calculate. We put the VaR method into the assessment of the convertible bonds risk, and use the financial random process and Monte Carlo method to calculate the VaR of the option. Then we can get the VaR of convertible bonds.We collected twenty-seven convertible bonds' relative data on January, 25th ,2007 in our country stock market. We used this data to calculate their VaR with the Monte Carlo method and other computer method. After that, we found that the stock price, the fluctuation ratio of stock price, the liquidity of convertible bonds, the circulation of convertible bonds and the conversion premium ratio influence the risk of convertible bonds. Then we set up an econometric model, and analyzed the stock price, the fluctuation ratio of stock price, the liquidity of convertible bonds, the circulation of convertible bonds and the conversion premium ratio how to influence the risk of convertible bonds based on the econometric model by SPSS.At last, we concluded the fluctuation ratio of stocks price and the liquidity of convertible bonds are the most important ones. The fluctuation ratio of stocks price is a systematic factor, we can't change it. Although we can't control the fluctuation ratio of convertible, we can improve the liquidity of convertible. So we can reduce the risk of convertible bonds by improving its liquidity. Then we can promote the development of convertible bonds in our country.