Valuation of bermudan options and application to hybrid securities / by Neil Brown.

Brown, Neil. (2004). Valuation of bermudan options and application to hybrid securities / by Neil Brown. Honours Thesis, School of Business, The University of Queensland.

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Author Brown, Neil.
Thesis Title Valuation of bermudan options and application to hybrid securities / by Neil Brown.
School, Centre or Institute School of Business
Institution The University of Queensland
Publication date 2004
Thesis type Honours Thesis
Total pages 112
Language eng
Subjects 14 Economics
Formatted abstract
Hybrid Securities are becoming an increasingly important component of the Australian financial market. Not only has the volume of Hybrid Security issues been increasing in recent years, but so too has the range and complexity of terms attached to the individual instruments. Little existing literature focuses on the development of pricing models for Hybrid Securities with complicated conditions and characteristics. This thesis investigates the market pricing of three issues of Convertible Notes currently trading on the Australian Stock Exchange. Each security selected for analysis provides investors with the opportunity to convert from debt into equity on one of several discrete conversion dates prior to the security's maturity. This conversion structure is consistent with the exercise opportunities of a Bermudan Call Option, which can be exercised on one of several discrete dates prior to the option's expiry. This thesis develops a binomial option pricing model in order to demonstrate the effect of changing parameters on the behaviour of Bermudan Call and Put Options, and applies this model to the aforementioned traded securities. The values derived by the model track the movements in traded prices, albeit at a higher level of value. The pricing model appears unable to fully explain observed traded prices, implying that the model cannot capture the full information set used by the market to price the securities. The most likely explanation of this mispricing is the existence of redemption conditions attached to the securities which are contingent on events which are difficult to reflect in the pricing model. Results also suggest that given stocks paying little or no dividends, very little additional value is attributed to the early exercise opportunities provided by Convertible Notes possessing conversion structures consistent with those of Bernludan Call Options.

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Created: Wed, 17 Nov 2010, 16:57:27 EST by Mr Kevin Liang on behalf of The University of Queensland Library