Forthcoming events in this series


Fri, 17 Jun 2005
14:15
DH 3rd floor SR

Modelling Credit Spread, Implied Volatility, and Optimal Capital Structure with Endogenous Default and Jump Risk

Steve Kou
(Columbia University (New York))
Abstract

A firm issues a convertible bond. At each subsequent time, the bondholder

must decide whether to continue to hold the bond, thereby collecting coupons, or

to convert it to stock. The bondholder wishes to choose a conversion strategy to

maximize the bond value. Subject to some restrictions, the bond can be called by

the issuing firm, which presumably acts to maximize the equity value of the firm

by minimizing the bond value. This creates a two-person game. We show that if

the coupon rate is below the interest rate times the call price, then conversion

should precede call. On the other hand, if the dividend rate times the call

price is below the coupon rate, call should precede conversion. In either case,

the game reduces to a problem of optimal stopping. This is joint work with Mihai

Sirbu.

Fri, 03 Jun 2005
14:15
DH 3rd floor SR

Modelling Credit Spread, Implied Volatility, and Optimal Capital Structure with Endogenous Default and Jump Risk

Steven Shreve
(Carnegie Mellon University)
Abstract
We propose a model for credit risk with endogenous default and jump risk. The model has four attractive features.
  1. It can generate flexible credit spread curves.
  2. It leads to flexible implied volatility curves, thus providing a link between credit spread and implied volatility.
  3. It implies that high tech firms tend to have very little debts.
  4. It yields analytical solutions for debt and equity values.
This is a joint work with Nan Chen (a Ph.D. student at Columbia University).
Fri, 20 May 2005
14:15
DH 3rd floor SR

Evaluation of European and American options under de Variance Gamma
process with grid stretching and accurate discretization.

Kees Oosterlee
(Delft)
Abstract

In this talk, we present several numerical issues, that we currently pursue,

related to accurate approximation of option prices. Next to the numerical

solution of the Black-Scholes equation by means of accurate finite differences

and an analytic coordinate transformation, we present results for options under

the Variance Gamma Process with a grid transformation. The techniques are

evaluated for European and American options.