Preprint B87/2016
Convertible Bond Pricing: A Monte Carlo Approach
Keywords: convertible bond | least-squared Monte Carlo | hedged Monte Carlo

Convertible Bonds are interesting hybrid instruments with debt- and equity-like features that
have received increasing attention for the last years, especially after the sub-prime mortgage
crisis in 2008. This work aims at presenting the main concept behind those instruments, its
related features and pricing issues, exhibiting in a constructive manner, from simple products
to complex ones, how one may model and price them.

To deal with the possibility of American exercises, we implement least-squared and hedged
Monte Carlo pricing methods. A clear, flexible, extensible and ready-to-use code implementation
for the proposed pricing framework is provided together with some examples of
contracts. A discussion of attained numerical results is also presented.