Re: callable bonds

Posted by Allen Kuo on
URL: http://quantlib.414.s1.nabble.com/callable-bonds-tp9638p9642.html

Hi John:  From what little I know, the optionality/callability in the convertible bond class is based on an underlying equity stochastic process. If you introduced a stochastic interest rate process into the model and the correlation between the two processes, then I would think it would be possible to have the (callable) convertible bond reduce to a "plain" callable bond ( i.e. where optionality is a function purely of interest rate volatility, not equity vol) when some parameter is set high enough so that it would never be converted to equity. If I can get the callable bond classes done, then I'd like to look into it bringing some machinery over, but the only engine I am working on now is tree-based and I don't know the standard engine for converts that model both processes.  Best, GZH

 

Message: 4
Date: Mon, 23 Jul 2007 12:19:48 +0000 (UTC)
From: John Maiden < [hidden email]>
Subject: Re: [Quantlib-dev] callable bonds
To: [hidden email]
Message-ID: <[hidden email]>
Content-Type: text/plain; charset=us-ascii

Allen-

     Maybe I'm missing something here, but wouldn't a
callable fixed rate bond be similar to a convertible bond?
All you have to do is make it a European option and then
set the conversion ratio so small that it will never be
converted at the final time.
     As for your bond spread issue, if you use a convertible
bond then you can also alter the Black-Scholes process that
goes into the bond to include zero curves.

John

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