@article {Spiegeleer27, author = {Jan De Spiegeleer and Wim Schoutens}, title = {Pricing Contingent Convertibles: A Derivatives Approach }, volume = {20}, number = {2}, pages = {27--36}, year = {2012}, doi = {10.3905/jod.2012.20.2.027}, publisher = {Institutional Investor Journals Umbrella}, abstract = {A major question raised in the 2008 financial crisis and its aftermath has been how a bank, or any financial institution, can strengthen its balance sheet after a major loss during a period of market unrest, when selling stock in the equity market on reasonable terms is unfeasible. Contingent convertible securities (CoCos) have been proposed as one solution. A CoCo is a debt instrument that automatically converts to equity upon the occurrence of a prespecified credit-related event, such as exceeding a trigger value for its core tier-1 capital ratio, or for the spread on credit default swaps that reference it in the market. Pricing approaches for CoCos either treat them as a kind of credit derivative, or alternatively, more like callable bonds. In the first case, the stock that would replace the CoCo following a trigger event plays the role of the recovery rate in a default risk model. The second approach focuses on conversion of a CoCo as being like exercise of a put option, in which the issuer puts shares to the CoCo holders, with the value of their bond-like security as the exercise price. Spiegeleer and Schoutens present both kinds of models and then show how each would handle a particular real world CoCo issued by Lloyds Banking Group.TOPICS: Credit default swaps, credit risk management, financial crises and financial market history}, issn = {1074-1240}, URL = {https://jod.pm-research.com/content/20/2/27}, eprint = {https://jod.pm-research.com/content/20/2/27.full.pdf}, journal = {The Journal of Derivatives} }