Re: [Quantlib-dev] callable bonds

[Zhonghua G. <zho...@gm...>]

Hi John:  From what little I know, the optionality/callability in the
convertible bond class is based on an underlying equity stochastic process.
If you introduced a stochastic interest rate process into the model and the
correlation between the two processes, then I would think it would be
possible to have the (callable) convertible bond reduce to a "plain"
callable bond (i.e. where optionality is a function purely of interest rate
volatility, not equity vol) when some parameter is set high enough so that
it would never be converted to equity. If I can get the callable bond
classes done, then I'd like to look into it bringing some machinery
over, but the only engine I am working on now is tree-based and I don't know
the standard engine for converts that model both processes.  Best, GZH


Message: 4
Date: Mon, 23 Jul 2007 12:19:48 +0000 (UTC)
From: John Maiden <jwm...@ya...>
Subject: Re: [Quantlib-dev] callable bonds
To: qua...@li...
Message-ID: <loo...@po...>
Content-Type: text/plain; charset=us-ascii

Allen-

     Maybe I'm missing something here, but wouldn't a
callable fixed rate bond be similar to a convertible bond?
All you have to do is make it a European option and then
set the conversion ratio so small that it will never be
converted at the final time.
     As for your bond spread issue, if you use a convertible
bond then you can also alter the Black-Scholes process that
goes into the bond to include zero curves.

John