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The Risk Management Of Contingent Convertible Coco Bonds
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Book Synopsis The Risk Management of Contingent Convertible (CoCo) Bonds by : Jan De Spiegeleer
Download or read book The Risk Management of Contingent Convertible (CoCo) Bonds written by Jan De Spiegeleer and published by Springer. This book was released on 2018-11-02 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides an overview of the risk components of CoCo bonds. CoCos are hybrid financial instruments that convert into equity or suffer a write-down of the face value upon the appearance of a trigger event. The loss-absorption mechanism is automatically enforced either via the breaching of a particular accounting ratio, typically in terms of the Common Equity Tier 1 (CET1) ratio, or via a regulatory trigger. CoCos are non-standardised instruments with different loss-absorption and trigger mechanisms. They might also contain additional features such as the cancellation of coupon payments. Different pricing models are discussed in detail. These models use market data such as share prices, CDS levels and implied volatility in order to calculate the theoretical price of a CoCo bond and its sensitivities, providing the investor with insides to hedge from adverse changes in the market conditions. The audience are professionals as well as academics who want to learn how to risk manage CoCo bonds using cutting edge techniques as well as all the risk involved in CoCo bonds.
Book Synopsis Contingent Convertible Bonds, Corporate Hybrid Securities and Preferred Shares by : Marcin Liberadzki
Download or read book Contingent Convertible Bonds, Corporate Hybrid Securities and Preferred Shares written by Marcin Liberadzki and published by Springer. This book was released on 2019-06-17 with total page 229 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a comprehensive guide to the new generation of hybrid securities: subordinated and perpetual bonds with deferrable coupon first issued around 2003, and the youngest member of the hybrids family named CoCos (contingent convertibles) being a product of Basel III or European Union CRD IV regime (2014). Contingent capital constitutes a contractual recapitalization mechanism for troubled financial institutions. An increasing number of European banks have issued CoCo bonds in order to bolster their capital ratios. Following the EU pattern, CoCos issues have become increasingly popular within banks in Asia and the Pacific. The EU regulatory treatment of the contingent convertibles issued by banks and insurers together with bank bail-in instruments is at the forefront of the book. Furthermore, the book provides an overview of hybrids pricing and risk assessment approach and covers the non-voting preferred stocks as another hybrids class.
Book Synopsis Contingent Convertible ('CoCo') Bonds by : Sascha Wilkens
Download or read book Contingent Convertible ('CoCo') Bonds written by Sascha Wilkens and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: With several banks issuing substantial amounts of contingent convertible (“coco”) bonds since 2009 this paper is the first to analyse empirically the suitability of selected pricing models that have been proposed for this kind of instrument. The analysis of coco bond issues by major banks shows that all tested approaches - a structural, an equity derivatives and a credit derivatives model - are largely able to fit observed coco bond prices. Regarding the derivation of hedge ratios, however, all models are found to exhibit biases. Overall, the results point to the equity derivatives model with its straightforward parameterisation and interpretation as the comparatively most promising approach for the practical pricing and risk management of coco bonds. Given the limited set of bonds and time series available for the analysis, more empirical research into the still young market is required.
Book Synopsis The Handbook of Hybrid Securities by : Jan De Spiegeleer
Download or read book The Handbook of Hybrid Securities written by Jan De Spiegeleer and published by John Wiley & Sons. This book was released on 2014-05-19 with total page 421 pages. Available in PDF, EPUB and Kindle. Book excerpt: Introducing a revolutionary new quantitative approach to hybrid securities valuation and risk management To an equity trader they are shares. For the trader at the fixed income desk, they are bonds (after all, they pay coupons, so what's the problem?). They are hybrid securities. Neither equity nor debt, they possess characteristics of both, and carry unique risks that cannot be ignored, but are often woefully misunderstood. The first and only book of its kind, The Handbook of Hybrid Securities dispels the many myths and misconceptions about hybrid securities and arms you with a quantitative, practical approach to dealing with them from a valuation and risk management point of view. Describes a unique, quantitative approach to hybrid valuation and risk management that uses new structural and multi-factor models Provides strategies for the full range of hybrid asset classes, including convertible bonds, preferreds, trust preferreds, contingent convertibles, bonds labeled "additional Tier 1," and more Offers an expert review of current regulatory climate regarding hybrids, globally, and explores likely political developments and their potential impact on the hybrid market The most up-to-date, in-depth book on the subject, this is a valuable working resource for traders, analysts and risk managers, and a indispensable reference for regulators
Book Synopsis The Pricing of already issued Contingent Convertible Bonds (CoCo-Bonds) by : Melanie Prossliner
Download or read book The Pricing of already issued Contingent Convertible Bonds (CoCo-Bonds) written by Melanie Prossliner and published by GRIN Verlag. This book was released on 2013-01-08 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seminar paper from the year 2011 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,2, University of Innsbruck (Banking and Finance), course: Risk Management, language: English, abstract: In the year 2007 one of the biggest financial crisis in worlds history has begun. It leads to the bankruptcy of huge financial institution followed by the bailout of banks through the national government and a downturn in worldwide stock markets. The financial crisis has also shown that the capitalizations of numerous financial institutes were not adequate and several components of banks equity could not fulfil their planned function. To save the global financial system from collapsing many banks received lot of money from the government. To avoid another future crisis and huge bailouts by the national government, some financial experts and leading economists proposed a new financial instrument, called Contingent Convertibles Bonds (“CoCo-Bonds”). They are considered to be an opportunity to improve the equity base of banks in times of crisis. CoCo-Bonds are a special form of bonds, which convert automatically to equity after a predefined incidence. Three large banks have already issued these new financial instruments; The Lloyds Banking Group (2009), Rabobank (2010) and the Credit Suisse (2011). The aim of this paper is to analyse the structure and the pricing of these already issued CoCo- Bonds. In the first part the functionality of the CoCo-Bonds will be explained. It will also provide a summary of the specification of the already issued CoCo-Bonds. The third part, which is the main part, is focused on the pricing modalities of these new financial instruments. Two different approaches will be considered. First the credit derivatives approach and seconds the equity derivatives approach. In the end of the paper both approaches will be applied to the already issued CoCo-Bonds of Lloyds and Credit Suisse.
Book Synopsis Mind the Conversion Risk: a Theoretical Assessment of Contingent Convertible Bonds by : Gaëtan LeQuang
Download or read book Mind the Conversion Risk: a Theoretical Assessment of Contingent Convertible Bonds written by Gaëtan LeQuang and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Risk-taking, Competition and Uncertainty by : Mahmoud Fatou
Download or read book Risk-taking, Competition and Uncertainty written by Mahmoud Fatou and published by . This book was released on 2022 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: We assess the impact of contingent convertible (CoCo) bonds and the wealth transfers they imply conditional on conversion on the risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks by issuing CoCo bonds try to maintain risk-taking incentives when regulators reduce them through higher capitalization ratios? While we test for and reject sample selection bias, we show that CoCo bonds issuance has a strong positive effect on risk-taking behaviour, and so do conversion parameters that reduce dilution of existing shareholders upon conversion. Higher volatility amplifies the impact of CoCo bonds on risk-taking.
Book Synopsis Risk-taking and Uncertainty by : Mahmoud Fatouh
Download or read book Risk-taking and Uncertainty written by Mahmoud Fatouh and published by . This book was released on 2021 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Contingent Convertibles [Cocos]: A Potent Instrument For Financial Reform by : George M Von Furstenberg
Download or read book Contingent Convertibles [Cocos]: A Potent Instrument For Financial Reform written by George M Von Furstenberg and published by World Scientific. This book was released on 2014-08-08 with total page 287 pages. Available in PDF, EPUB and Kindle. Book excerpt: Contingent Convertibles (CoCos) represent debt that is subject to being converted automatically into common equity under pre-specified terms of conversion if the chosen regulatory capital ratio falls to a level triggering conversion. CoCos are that subspecies of contingent capital that references regulatory (Basel III) concepts in its triggers. From 2014, trigger points are set by common equity (Common Equity Tier 1 [CET1]) in percent of risk-weighted assets [RWA] or of more complicated measures of total exposure to a variety of risks, particularly credit risk. This is the first comprehensive book on CoCos, an innovative instrument that has attracted growing attention since it was first issued in 2009.The book is mostly concerned with going-concern ‘recovery-’ rather than ‘resolution-’ CoCos, because avoiding failure and costly disruption of financial networks without government financing is the first order of business. CoCos hold a high promise of providing fully loss-absorbing equity capital when it is most needed and least available to financial institutions. Yet, having grown out of the 2007-2009 financial crisis, they are still an ‘infant’ reform instrument in many respects. Few of the instrument's design features (or even the rating, regulatory, and tax treatments) are entirely settled. This book seeks to move the discussion toward, and then past, the main decision points so that CoCos can prove their value for contingency planning and self-insurance all over the world. It is intended to increase the ability of issuers and investors to analyze and understand the different kinds of CoCos.
Book Synopsis Do Contingent Convertible (CoCo) Bonds Increase the Risk Appetite of Banks? by : Mahmoud Fatouh
Download or read book Do Contingent Convertible (CoCo) Bonds Increase the Risk Appetite of Banks? written by Mahmoud Fatouh and published by . This book was released on 2022 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We assess the impact of contingent convertible (CoCo) bonds and the wealth transfers they imply conditional on conversion on the risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks try to maintain risk-taking incentives by issuing CoCo bonds, when regulators reduce them through higher capitalization ratios? While we test for, and reject sample selection bias, we show that CoCo bonds issuance has a strong positive e↵ect on risk-taking behaviour, particularly with conversion parameters that reduce dilution of existing shareholders upon conversion. Higher economic volatility amplifies the impact of CoCo bonds on risk-taking.
Book Synopsis Risk Management and Contingent Convertible Bonds by :
Download or read book Risk Management and Contingent Convertible Bonds written by and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Coco-Bonds as a Method of Equity Boost by : Philipp Rothe
Download or read book Coco-Bonds as a Method of Equity Boost written by Philipp Rothe and published by GRIN Verlag. This book was released on 2023-08-04 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: Academic Paper from the year 2021 in the subject Business economics - Investment and Finance, grade: 1,7, International School Of Management, Campus Frankfurt, language: English, abstract: This term paper will start with describing some basic characteristics of Coco-Bonds and their market behaviour. This first chapter should help to understand the product itself and its features. Afterwards the basic idea behind Basel III and resulting regulations under CRD and CRR are described and linked to Coco-Bonds as a product. In the last chapter it is discussed whether and under which circumstances Coco-Bonds belong to the equity capital of a bank and thus strengthen the equity base. After the financial crisis in 2008 one of the main objectives the regulatory- and supervisory authority had, was to strengthen and increase the equity base of banks. This should ensure a better preparation for coming crises. In October 2011 the Basel Committee set the stage for a financial product, allowing it to play a ma-jor role in building up regulatory equity capital, as defined in Basel III. The product to reach the regulatory requirements are Contingent Convertible Bonds (short: Coco-Bonds). These bonds are a niche financial product which, as a result of the increasing regulatory requirements, in recent years were often issued by banks. Although these securities are issued as a bond with a fixed coupon, in case of a certain event, the Coco-Bonds are converted into equity or are written off. Due to this, Coco-Bonds often pay a high coupon rate, which could make them, especially within the currently low interest rate environment, look like an attractive investment. However a high coupon payment always means a related risk.
Book Synopsis The Squam Lake Report by : Kenneth R. French
Download or read book The Squam Lake Report written by Kenneth R. French and published by Princeton University Press. This book was released on 2010-05-25 with total page 182 pages. Available in PDF, EPUB and Kindle. Book excerpt: A nonpartisan plan of action for fixing the global economy from fifteen of the world's leading economists In the fall of 2008, fifteen of the world's leading economists—representing the broadest spectrum of economic opinion—gathered at New Hampshire's Squam Lake. Their goal: the mapping of a long-term plan for financial regulation reform. The Squam Lake Report distills the wealth of insights from the ongoing collaboration that began at these meetings and provides a revelatory, unified, and coherent voice for fixing our troubled and damaged financial markets. As an alternative to the patchwork solutions and ideologically charged proposals that have dominated other discussions, the Squam Lake group sets forth a clear nonpartisan plan of action to transform the regulation of financial markets—not just for the current climate—but for generations to come. Arguing that there has been a conflict between financial institutions and society, these diverse experts present sound and transparent prescriptions to reduce this divide. They look at the critical holes in the existing regulatory framework for handling complex financial institutions, retirement savings, and credit default swaps. They offer ideas for new financial instruments designed to recapitalize banks without burdening taxpayers. To lower the risk that large banks will fail, the authors call for higher capital requirements as well as a systemic regulator who is part of the central bank. They collectively analyze where the financial system has failed, and how these weak points should be overhauled. Combining an immense depth of academic, private sector, and public policy experience, The Squam Lake Report contains urgent recommendations that will positively influence everyone's financial well-being—all who care about the world's economic health need to pay attention.
Book Synopsis The Handbook of Convertible Bonds by : Jan De Spiegeleer
Download or read book The Handbook of Convertible Bonds written by Jan De Spiegeleer and published by Wiley. This book was released on 2011-03-14 with total page 400 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a complete guide to the pricing and risk management of convertible bond portfolios. Convertible bonds can be complex because they have both equity and debt like features and new market entrants will usually find that they have either a knowledge of fixed income mathematics or of equity derivatives and therefore have no idea how to incorporate credit and equity together into their existing pricing tools. Part I of the book covers the impact that the 2008 credit crunch has had on the markets, it then shows how to build up a convertible bond and introduces the reader to the traditional convertible vocabulary of yield to put, premium, conversion ratio, delta, gamma, vega and parity. The market of stock borrowing and lending will also be covered in detail. Using an intuitive approach based on the Jensen inequality, the authors will also show the advantages of using a hybrid to add value - pre 2008, many investors labelled convertible bonds as 'investing with no downside', there are of course plenty of 2008 examples to prove that they were wrong. The authors then go onto give a complete explanation of the different features that can be embedded in convertible bond. Part II shows readers how to price convertibles. It covers the different parameters used in valuation models: credit spreads, volatility, interest rates and borrow fees and Maturity. Part III covers investment strategies for equity, fixed income and hedge fund investors and includes dynamic hedging and convertible arbitrage. Part IV explains the all important risk management part of the process in detail. This is a highly practical book, all products priced are real world examples and numerical examples are not limited to hypothetical convertibles. It is a must read for anyone wanting to safely get into this highly liquid, high return market.
Book Synopsis The Effects of Contingent Convertible (Coco) Bonds on Insurers' Capital Requirements Under Solvency II. by : Tobias Niedrig
Download or read book The Effects of Contingent Convertible (Coco) Bonds on Insurers' Capital Requirements Under Solvency II. written by Tobias Niedrig and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The Liikanen Group proposes contingent convertible (CoCo) bonds as a potential mechanism to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders, as they are already the largest purchasers of bank bonds in Europe. We develop a stylised model with a direct financial connection between banking and insurance and study the effects of various types of bonds such as non-convertible bonds, write-down bonds and CoCos on banks' and insurers' risk situations. In addition, we compare insurers' capital requirements under the proposed Solvency II standard model as well as under an internal model that ex ante anticipates additional risks due to possible conversion of the CoCo bond into bank shares. In order to check the robustness of our findings, we consider different CoCo designs (write-down factor, trigger value, holding time of bank shares) and compare the resulting capital requirements with those for holding non-convertible bonds. We identify situations in which insurers benefit from buying CoCo bonds due to lower capital requirements and higher coupon rates. Furthermore, our results highlight how the Solvency II standard model can mislead insurers in their CoCo investment decision due to economically irrational incentives.
Book Synopsis The Effects of Contingent Convertible (CoCo) Bonds on Insurers' Capital Requirements Under Colvency II by : Tobias Niedrig
Download or read book The Effects of Contingent Convertible (CoCo) Bonds on Insurers' Capital Requirements Under Colvency II written by Tobias Niedrig and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The Liikanen Group proposes contingent convertible (CoCo) bonds as a potential mechanism to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. We develop a stylized model with a direct financial connection between banking and insurance and study the effects of various types of bonds such as non-convertible bonds, write-down bonds and CoCos on banks' and insurers' risk situations. In addition, we compare insurers' capital requirements under the proposed Solvency II standard model as well as under an internal model that ex-ante anticipates additional risks due to possible conversion of the CoCo bond into bank shares. In order to check the robustness of our findings, we consider different CoCo designs (write-down factor, trigger value, holding time of bank shares) and compare the resulting capital requirements with those for holding non-convertible bonds. We identify situations in which insurers benefit from buying CoCo bonds due to lower capital requirements and higher coupon rates. Furthermore, our results highlight how the Solvency II standard model can mislead insurers in their CoCo investment decision due to economically irrational incentives.
Book Synopsis Why Do Banks Issue Contingent Convertible Bonds? by : Barry Williams
Download or read book Why Do Banks Issue Contingent Convertible Bonds? written by Barry Williams and published by . This book was released on 2018 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates why banks issue Contingent Convertible Bonds (CoCos). We find that a bank's systemic risk level is a possible reason for CoCo issuance. Contrary to the pecking order theory, earnings management practices play a lesser role, and there is no evidence of banks becoming riskier after issuing CoCos. However, we find systemically riskier banks are more likely to issue CoCos. Thus, riskier banks may be utilising CoCo loss absorption mechanisms to partially internalise the costs of future loan losses. If banks are issuing such instruments without regulatory prompting, then an issuance may signal the need to provide greater oversight. Conversely, if such issuances do result from regulatory prompting, then banks may be engaging in risk management strategies, minimising their cost of equity issuance.
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