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Pricing convertible bonds and change of probability measure

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Abstract

The changes of numeraire can be used as a very powerful tool in pricing contingent claims in the context of a complete market. By using the method of numeraire changes to evaluate convertible bonds when the value of firm, and those of zero-coupon bonds follow general adapted stochastic processes in this paper, using It_o theorem and Gisanov theorem. A closed-form solution is derived under the stochastic volatility by using fast Fourier transforms.

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Correspondence to Shuguang Zhang.

Additional information

This paper was supported by the National key scientific instrument and Equipment Development Program of China under Grant No. 2012YQ220119; Anhui Provincial Natural Science Foundation under Grant No. 1308085 MF93; the Fundamental Research Foundation for the Central Universities under Grant No. 2013HGXJ0223, and National Natural Science Foundations of China under Grant No. 11201108.

This paper was recommended for publication by Editor WANG Shouyang.

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Jia, Z., Zhang, S. Pricing convertible bonds and change of probability measure. J Syst Sci Complex 26, 968–977 (2013). https://doi.org/10.1007/s11424-013-2061-1

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  • DOI: https://doi.org/10.1007/s11424-013-2061-1

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