Pricing Contingent Convertibles - in an intensity based model

Abstract

As a result of the recent years financial instability, governments have developed new regulatory frameworks for bank capital adequacy. Authorities have become more aware of keeping capital as a buffer to absorb potential losses. Due to this, a new financial instrument, so-called Contingent convertibles (CoCos) have become more interesting. A CoCo bond converts automatically or suffers a write-down when the financial institution is facing a though time and can therefore strength the banks capital structure before the point of non-viability is reached. Currently, only a few CoCos have been issued but at the moment, several financial institutions are waiting for regulatory frameworks to be implemented, in order to issue CoCos. As CoCos are relatively new there is naturally an interest of how to price CoCos. We will in this thesis analyze one pricing model, namely the Credit Derivative approach on how to price CoCos. Further, applications with fictive data and real data from Swedish banks will be made.