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Diskussionspapiere - Hannover Economic Papers (HEP)

Worst Case Pricing of Reverse Convertibles

Autor: Topper, J├╝rgen
Nummer: 236, Nov 2000, pp. 21

Reverse Convertibles have become very popular in the German market. They are a common banking product for the private customer as well as for the institutional investor. Like ordinary convertibles it is a hybrid product. Its price depends on the development of one or several stock or indices as well as interest rates. To compute the price of this product one needs several input parameter such as volatility, dividends, interest rates, and correlation. These parameters normally cannot be estimated or forecasted exactly. However, it is often possible to give lower and upper bounds. Based on this information it is possible to derive worst case scenario models. These models are non-linear parabolic PDEs. We will show how to implement these models using a collocation finite element method. As examples we take several reverse convertibles which are traded currently.

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