Pricing convertible bonds under a jump diffusion model based on a multi-tree approach

Convertible bonds are derivative financial products with multiple investment characteristics of bonds, stocks and options, and their pricing research has received more and more attention. We use the jump-diffusion process to describe the dynamics of stock price, and introduce the HS tree model to derive the corresponding iterative formulas of convertible bond’s price. Our results show that the convergence speed of the HS model is high and the deviation of the estimator is small. Compared with Monte Carlo simulation, the HS tree model has advantages in accuracy and efficiency. From the sensitivity analysis, the price of the convertible bond is significantly affected by the conversion price and the volatility of the stock’s price. The higher the volatility of the stock’s price is, the higher the value of the convertible bond is.