Browsing by Author "Puranen, Ilari"

We introduce a new model for contingent convertibles. The write-down, or equity conversion, and default of the contingent convertible are modeled as states of conditional Markov process. Valuation formulae for different financial contracts, like CDS and different types of contingent convertibles, are derived. The Model can be thought of as an extension to reduced form models with an additional state. For practical applications, this model could be used for new type of contingent convertible derivatives in a similar fashion than reduced form models are used for credit derivatives.