The aim of this thesis is to shed more light into practical challenges related to pricing of contingent convertibles by empirically evaluating validity of two most crucial modelling assumptions of contingent convertible pricing framework. First assumption is that contractually specified capital ratio can be proxied by stock price level. Second modelling assumption is that volatility smile characteristic for stock market can be also incorporated into the contingent pricing model. First assumption is tested by comparison of probability of conversion implied by balance sheet figures with probability implied by market spreads. Analysis of our dataset indicates that probability implied by figures reported on balance sheet of issuer is statistically higher than probability estimated by market participants, suggesting that there is a confidence that reported figures do not fully represent the capital position of issuer and its ability to raise additional capital and revert the potential conversion. New information available on balance sheet also does not tend to immediately and fully materialize in contingent convertibles market. Secondly, incorporation of volatility smile characteristic for stock market leads to very low and unstable trigger level compared to level implied by balance sheet. Finally,...

Contingent Convertibles (CoCos) are a new type of hybrid debt instrument characterized by forced equity conversion or write-down under a specified trigger event, usually indicating a state of near non-viability of the Additional Tier 1 capital category, giving them additional features such as possible coupon cancellation. In this thesis, the structure of CoCos is presented and different pricing approaches are introduced. A special focus is put on structural models with the Analytically Tractable First Passage Time(AT1P) Model and its extensions. Two models are applied on the write-down CoCo issued by Svenska Handelsbanken, starting with the equity derivative model and followed by the AT1P model. / Contingent Convertibles (Cocos) - villkorade konvertibla obligationer, är en ny typ av hybridinstrument som kännetecknas av konvertering till eget kapital eller nedskrivning av lånet vid en viss utlösande händelse, som vanligtvis indikerar ett tillstånd där den emitterande banken har behov av att absorbera förluster. Under strikta villkor kan dessa CoCo obligationer tillhöra primärkapital, där de kännetecknas av bland annat möjlig inställning av kuponger. I denna avhandling presenteras CoCons struktur och olika prissättningsmodeller läggs fram. Ett särskilt fokus läggs på strukturella modeller med “Analytically Tractable First Passage Time (AT1P) Model” och dess utvidgningar. Två modeller tillämpas på CoCon emitterad av Svenska Handelsbanken: “equity derivative” modellen och AT1P modellen.