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Table of Contents
Intro; Preface; Contents; 1 A Primer on Contingent Convertible (CoCo) Bonds; 1.1 What is a CoCo?; 1.1.1 Write-Down CoCos; 1.1.2 Conversion CoCos; 1.1.3 Contingent Conversion Convertible Bonds (CoCoCo); 1.2 The Trigger Mechanism; 1.3 Overview of the Risks; 1.3.1 Complexity and Non-standardisation; 1.3.2 Distance to Trigger; 1.3.3 Non-cumulative Coupon Cancellation; 1.3.4 Extension Risk; 1.3.5 Recovery Rate; 1.3.6 Liquidity Risk; 1.3.7 Negative Convexity; 1.4 Basel III Guidelines and CRD IV Regulation; 1.5 Effectiveness of Issuing CoCos; 1.5.1 Automatic Loss Absorption
1.5.2 Create Right Incentives1.5.3 Tax Benefit; 1.5.4 Proofs of Effect; 1.6 Type of Investors; 1.7 CoCo Market; 1.8 Conclusion; 2 Pricing Models for CoCos; 2.1 Credit Derivatives Approach; 2.1.1 Credit Triangle; 2.1.2 CoCo Pricing; 2.1.3 Recovery Rate; 2.1.4 Probability of Triggering; 2.2 Equity Derivatives Approach; 2.3 Implied CET1 Volatility Model; 2.4 Conclusion; 3 Sensitivity Analysis of CoCos; 3.1 Hedging CoCos; 3.2 Sensitivity Parameters; 3.2.1 The Greeks; 3.2.2 Estimating the Greeks of a CoCo; 3.3 Beta Coefficient; 3.4 Goodness-of-Fit; 3.5 Conclusion
4 Impact of Skewness on the Price of a CoCo4.1 Heston Model; 4.1.1 Pricing of Vanilla Options; 4.1.2 Pricing of Exotic Options; 4.1.3 Calibration; 4.2 Case Study
Barclays; 4.3 Sensitivity to Parameters of the Heston Model; 4.3.1 Example of Barclays' CoCo; 4.3.2 Distressed Versus Non-distressed Situation; 4.4 Implied Volatility Surface; 4.5 Conclusions; 5 Distance to Trigger; 5.1 Distance to Trigger Versus CoCo Spread; 5.2 Adjusted Distance to Trigger; 5.3 Coupon Cancellation Risk; 5.4 Conclusion; 6 Outlier Detection of CoCos; 6.1 Value-at-Risk Equivalent Volatility (VEV)
6.1.1 Common Pitfalls6.1.2 Case Study: Risk of Different Asset Classes; 6.2 Are CoCos Moving Out of Sync?; 6.2.1 Minimum Covariance Determinant (MCD); 6.2.2 Measuring the Outliers; 6.3 Conclusion; 7 Conclusion; References
1.5.2 Create Right Incentives1.5.3 Tax Benefit; 1.5.4 Proofs of Effect; 1.6 Type of Investors; 1.7 CoCo Market; 1.8 Conclusion; 2 Pricing Models for CoCos; 2.1 Credit Derivatives Approach; 2.1.1 Credit Triangle; 2.1.2 CoCo Pricing; 2.1.3 Recovery Rate; 2.1.4 Probability of Triggering; 2.2 Equity Derivatives Approach; 2.3 Implied CET1 Volatility Model; 2.4 Conclusion; 3 Sensitivity Analysis of CoCos; 3.1 Hedging CoCos; 3.2 Sensitivity Parameters; 3.2.1 The Greeks; 3.2.2 Estimating the Greeks of a CoCo; 3.3 Beta Coefficient; 3.4 Goodness-of-Fit; 3.5 Conclusion
4 Impact of Skewness on the Price of a CoCo4.1 Heston Model; 4.1.1 Pricing of Vanilla Options; 4.1.2 Pricing of Exotic Options; 4.1.3 Calibration; 4.2 Case Study
Barclays; 4.3 Sensitivity to Parameters of the Heston Model; 4.3.1 Example of Barclays' CoCo; 4.3.2 Distressed Versus Non-distressed Situation; 4.4 Implied Volatility Surface; 4.5 Conclusions; 5 Distance to Trigger; 5.1 Distance to Trigger Versus CoCo Spread; 5.2 Adjusted Distance to Trigger; 5.3 Coupon Cancellation Risk; 5.4 Conclusion; 6 Outlier Detection of CoCos; 6.1 Value-at-Risk Equivalent Volatility (VEV)
6.1.1 Common Pitfalls6.1.2 Case Study: Risk of Different Asset Classes; 6.2 Are CoCos Moving Out of Sync?; 6.2.1 Minimum Covariance Determinant (MCD); 6.2.2 Measuring the Outliers; 6.3 Conclusion; 7 Conclusion; References