A.J. Grau, P.A. Forsyth, and K.R. Vetzal (Canada)
Derivatives, valuation, hedging, modelling and simulation.
Most methods for valuing convertible bonds assume that the bond is continuously and instantly callable by the is suer. However, in practice convertible bonds can often be called only if advance notice is given to the holders. In this paper, we develop an accurate PDE method for valuing convertible bonds with a finite notice period. Example computations are presented which illustrate the effect of varying notice periods. The results are compared with other approximation methods.
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