| Summary: | A convertible bond (CB) is a financial derivative, a so called hybrid security. It is an issued contract from a company or a government, which is paid for up-front. The contract yields a known amount at the specified maturity date, unless the holder chooses to convert it into an amount of the underlying asset. This kind of financial products can have complex features affecting the contract price and the optimal exercising situation. The partial differential equation (PDE) approach used for pricing financial derivatives makes it possible to describe convertible bonds with a physical model, a reversed diffusion described by a parabolic PDE. One can sometimes find both analytical and numerical solutions for this type of PDEs and interpret the solutions from a financial point of view, as they suggest predictable behaviour of the contract price.
|
|---|
