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The risk management of contingent convertible (CoCo) bonds

Author: Jan de Spiegeleer; Ine Marquet; Wim Schoutens
Publisher: Cham, Switzerland : Springer, 2018.
Series: SpringerBriefs in finance
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
This book provides an overview of the risk components of CoCo bonds. CoCos are hybrid financial instruments that convert into equity or suffer a write-down of the face value upon the appearance of a trigger event. The loss-absorption mechanism is automatically enforced either via the breaching of a particular accounting ratio, typically in terms of the Common Equity Tier 1 (CET1) ratio, or via a regulatory trigger.  Read more...
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Genre/Form: Electronic books
Additional Physical Format: Print version:
Spiegeleer, Jan de.
Risk management of contingent convertible (CoCo) bonds.
Cham, Switzerland : Springer, 2018
(OCoLC)1051638539
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Jan de Spiegeleer; Ine Marquet; Wim Schoutens
ISBN: 9783030018245 3030018245
OCLC Number: 1062439021
Description: 1 online resource (viii, 106 pages) : illustrations (some color)
Contents: Intro; Preface; Contents; 1 A Primer on Contingent Convertible (CoCo) Bonds; 1.1 What is a CoCo?; 1.1.1 Write-Down CoCos; 1.1.2 Conversion CoCos; 1.1.3 Contingent Conversion Convertible Bonds (CoCoCo); 1.2 The Trigger Mechanism; 1.3 Overview of the Risks; 1.3.1 Complexity and Non-standardisation; 1.3.2 Distance to Trigger; 1.3.3 Non-cumulative Coupon Cancellation; 1.3.4 Extension Risk; 1.3.5 Recovery Rate; 1.3.6 Liquidity Risk; 1.3.7 Negative Convexity; 1.4 Basel III Guidelines and CRD IV Regulation; 1.5 Effectiveness of Issuing CoCos; 1.5.1 Automatic Loss Absorption 1.5.2 Create Right Incentives1.5.3 Tax Benefit; 1.5.4 Proofs of Effect; 1.6 Type of Investors; 1.7 CoCo Market; 1.8 Conclusion; 2 Pricing Models for CoCos; 2.1 Credit Derivatives Approach; 2.1.1 Credit Triangle; 2.1.2 CoCo Pricing; 2.1.3 Recovery Rate; 2.1.4 Probability of Triggering; 2.2 Equity Derivatives Approach; 2.3 Implied CET1 Volatility Model; 2.4 Conclusion; 3 Sensitivity Analysis of CoCos; 3.1 Hedging CoCos; 3.2 Sensitivity Parameters; 3.2.1 The Greeks; 3.2.2 Estimating the Greeks of a CoCo; 3.3 Beta Coefficient; 3.4 Goodness-of-Fit; 3.5 Conclusion 4 Impact of Skewness on the Price of a CoCo4.1 Heston Model; 4.1.1 Pricing of Vanilla Options; 4.1.2 Pricing of Exotic Options; 4.1.3 Calibration; 4.2 Case Study --
Barclays; 4.3 Sensitivity to Parameters of the Heston Model; 4.3.1 Example of Barclays' CoCo; 4.3.2 Distressed Versus Non-distressed Situation; 4.4 Implied Volatility Surface; 4.5 Conclusions; 5 Distance to Trigger; 5.1 Distance to Trigger Versus CoCo Spread; 5.2 Adjusted Distance to Trigger; 5.3 Coupon Cancellation Risk; 5.4 Conclusion; 6 Outlier Detection of CoCos; 6.1 Value-at-Risk Equivalent Volatility (VEV) 6.1.1 Common Pitfalls6.1.2 Case Study: Risk of Different Asset Classes; 6.2 Are CoCos Moving Out of Sync?; 6.2.1 Minimum Covariance Determinant (MCD); 6.2.2 Measuring the Outliers; 6.3 Conclusion; 7 Conclusion; References
Series Title: SpringerBriefs in finance
Responsibility: Jan De Spiegeleer, Ine Marquet, Wim Schoutens.

Abstract:

This book provides an overview of the risk components of CoCo bonds. CoCos are hybrid financial instruments that convert into equity or suffer a write-down of the face value upon the appearance of a trigger event. The loss-absorption mechanism is automatically enforced either via the breaching of a particular accounting ratio, typically in terms of the Common Equity Tier 1 (CET1) ratio, or via a regulatory trigger. CoCos are non-standardised instruments with different loss-absorption and trigger mechanisms. They might also contain additional features such as the cancellation of coupon payments. Different pricing models are discussed in detail. These models use market data such as share prices, CDS levels and implied volatility in order to calculate the theoretical price of a CoCo bond and its sensitivities, providing the investor with insides to hedge from adverse changes in the market conditions. The audience are professionals as well as academics who want to learn how to risk manage CoCo bonds using cutting edge techniques as well as all the risk involved in CoCo bonds.--

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