Analysis and design of convertible bond based on incomplete market: Evidence from bank of China

Abstract

The study on convertible bonds is beneficial to regulate the issuing and trading of convertible bonds, to protect the benefits of investors and issuing corporations, and to guarantee the healthy and orderly development of China's financial market. In this paper, an ∈-arbitrage approach to 21-ary tree is expanded, and designs of the Bank of China convertible bonds' additional provisions are present. And then analysis of these additional provisions is given based on Monte Carlo method. We found the ∈-arbitrage approach is suitable for China's financial market, for the error is just 0.384%. We also found there are defects in the Bank of China convertible bonds' additional provisions. Hence, we design the put provision and downward provision. However, the empirical result is not ideal because of the randomness of Monte Carlo method.