Pricing Convertible Bonds Using Monte Carlo Simulations

Abstract: In this paper we dive into the world of pricing convertible bonds, with increasing complexity. This work aims to investigate the pricing methods behind different convertibles and see how well they agree with exact prices and benchmarks from established literature. The simulation-based techniques used for the European convertibles are regular Monte Carlo, and for the American with exercise opportunity before maturity, least-squares Monte Carlo with backward induction procedure. The findings in this paper do agree well with the analytical results and what previous papers have found.