Pricing Research On Convertible Bonds In China Based On Quasi Monte Carlo Method

A convertible bond is a special kind of corporate bonds, which can not only gain regular interest but also be converted into a sum of stocks at a certain price and time. Thus, it has a bilateral advantage that it can protect the principal for the investors when the economy is in depression, and make the investors enjoy the profits when in boom. Usually the interest rate offered by convertible bonds is much lower than the common corporate bonds, so the corporations are able to get the money at a lower cost in the way of issuing convertible bonds. Therefore, it attracts both the investors’ and issuers’ attention and flushes into the market.The first convertible bond appeared in the world170years ago when New York Erie Railway Corporation issued its convertible bond in1843. Convertible bonds began to make great progress until1970s, when the oil shocks broke out, and the interest rate soared in the western market. Another significant event for convertible bonds was the birth of Black-Scholes model, which offered a simple but accurate way to price the European convertible bonds. Now the biggest issuer around the world is the U.S., and the whole issuing volume of the earth is above600billion U.S. dollars.In August.1991, Hainan Energy Corporation issued the first convertible bonds in China. In the next several years, convertible bonds suffered a rugged road until2001. Now there exist21convertibles in our market.A convertible bond has many clauses, such as face value, interest rate, expiry date, conversion clause, call clause, put clause and downward revision clause etc, which made it rather difficult to price convertible bonds. The core of research on convertible bonds is to get accurate pricing methods.Former researches provide some methods for pricing. Such as single-factor model, double factor model, Black-Scholes model, binary tree model and monte carlo stimulation method and so on. Put provision and call provision are also considered to some extent in researchs. However, there are also a few disadvantages in them. Thus, this article will try to do some work in order to get improvement.Our work attempts to improve mainly in three aspects:First, we consider risk premium are not constant, instead, it is also influenced by stock price and its fluctuation rate. So we build dynamic risk premium model in the pricing process. Second, We take quasi-Monte Carlo method to simulate the stock price’s road. The difference between Monte Carlo and quasi-Monte Carlo is the use of different stochastic sequences. The latter takes the quasi stochastic sequence to calculate the value, which has better characters, such as well-distribution, lower difference and accelerated convergence etc. Third, this article noticed the delay phenomenon of call provision, the stock price is usually higher than the call price stipulated. So this article supposes the issuer has higher bearing ability in actual and assumes an extra threshold.We choose Heavy Industry convertible bonds as our research object. In the empirical research part, we made contrast of monte carlo and quasi monte carlo and then got the pricing result. Finally, this article analyzed the deviation causes.However, due to the scarcity of knowledge and experience, the author just did a few improvements in the article. It surely exists some shortcomings and hopes for criticisms and advice.