Re: Question on convertible bond (with discretesdividends)

Posted by benoit houzelle on
URL: http://quantlib.414.s1.nabble.com/Question-on-convertible-bond-with-discretesdividends-tp6450p6453.html

On Wed, 2009-12-02 at 16:20 +0000, benoit houzelle wrote: > add a display in the void > DiscretizedConvertible::applyConvertibility()  > to see what is the first node of the grid (for american exercise) : >  > And run the ConvertibleBonds.cpp (quantlib example) the result in the > test file is 37.483 and the spot was 36.00 >  > and 37.483 is spot - Sum(NPV(Div) + Sum(DIV) (see excel file simple > exemple without calendar adjustment...) Ok, I see. I was looking in the wrong spot.  You're right, dividends are added back in the DiscretizedConvertible::adjustedGrid() method without discounting, so it's most probably a bug.  May you add discounting, check that it works as expected, and send a patch?  You can do it by using process_->riskFreeRate(); if I'm not mistaken, the dividend amounts should be multiplied by discount(dividendTime)/discount(t), is that correct?   Your are right ! so we just change (thanks to Samuel Lerouge) function Disposable<Array> DiscretizedConvertible::adjustedGrid() const   Now the first spot node is 35.9996 (not 36 because we substact NPV of dividend without grid adjustement and we add NVP dividend with grid adjustement)   To have exactly 36 replace Time dividendTime = dividendTimes_[i]; by Time dividendTime = process_->riskFreeRate()->dayCounter().yearFraction(arguments_.settlementDate, arguments_.dividendDates[i]);   The calculation time increases from 1s to 3s with my configuration, it's why we used just once discount function.   Ps : for information the model used by Quantlib is not exactly the Tsiveriotis-Fernandes, it "seems" to be the Goldman Sachs Model (it is quite similar, it is exactely the same with a flat riskfree rate and without credit spread) The Goldman Sachs model could have problem like in a 2007 email http://osdir.com/ml/finance.quantlib.user/2007/msg00490.html Tsiveriotis-Fernandes Model have not this problem.   Regards,   Thanks,     Luigi -- Things should be made as simple as possible, but no simpler. -- Albert Einstein

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