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G-2023-58

Dynamic programming for valuing options embedded in corporate bonds

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We consider a structural model to design and evaluate the American call, conversion, and put options embedded in corporate bonds. We use dynamic programming and finite elements to efficiently solve the setting. We show option exercise policies can be characterized via a set of exercise thresholds. We achieve a sensitivity analysis of the option values with respect to the model parameters, and document on the default barriers and the exercise thresholds.

, 14 pages

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G2358.pdf (600 KB)