A structured PDE framework for pricing resettable convertible bonds

DOI10.1080/14697688.2026.2616345MaRDI QIDQ7229240zbMATH OpenFDO

Authors Hyuncheul Lim

Publication date 15 April 2026

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1080/14697688.2026.2616345

Mathematics Subject Classification ID

Degenerate parabolic equations (35K65) Finite difference methods for initial value and initial-boundary value problems involving PDEs (65M06) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Review text

This paper present a unified PDE framework for pricing resettable convertible bonds within the blended-discounting paradigm. The convertible-bond value is decomposed into a risky bond and a separately identified conversion-option component, which admits a closed-form solution in the conversion-only case. Reset clauses are modeled as a matrix-valued degenerate parabolic system, solved through a stable and convergent finite difference scheme. The resulting formulation preserves analytical clarity and computational efficiency. More precisely the author address known structural limitations of the \N\textit{K. Tsiveriotis} and \textit{C. Fernandes} model [``Valuing convertible bonds with credit risk, J. Fixed Income 8, 95--102 (1998)] by decomposing the convertible-bond value \(U\) into a risky bond component \(V\) and a conversion option \(W\), thereby clarifying the economic rationale of blended discounting. A unified variational inequality captures conversion, call, and put features via binary activation indicators, allowing consistent enforcement of early-exercise conditions including free-boundary and forced conversion. The system admits a unique viscosity solution, and numerical experiments demonstrate improved stability, accuracy, and interpretability compared to the classical Tsiveriotis-Fernandes framework.

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