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CONVERTIBLE
BOND PRICING MODEL
|
|
Abukar
M Ali
|
| This model is based
on Espen Gaarder Haage's
model which was originally
developed by Goldman-Sachs.
This Model is reproduced for educational purposes only and is intended to assist individuals in learning how convertible bonds work and are priced. |
| Model Description: |
| The stock price process
on each node on the tree
is assumed to follow the
following process: u = e^q*sqrt*dt for up movement. Q is the stock volatility, and dt is the time change. |
| The down movement of the tree is assumed to = 1/u |
| Assuming annual stock price move from each node, we are pricing the stock from t=0 and moving forward through the tree till t=5. |
| At node 4 (t=4), the stock price is equal to: St*u^4 for the top node, St*u^3*d, etc. |
| And the probability
for the up and down movements
are assumed to be: P = (e^r*td - d)/(u - d) for up movement and (1-p) for down movement. |
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