The Risk Management of Contingent Convertible (CoCo) Bonds by Jan De Spiegeleer & Ine Marquet & Wim Schoutens

Author:Jan De Spiegeleer & Ine Marquet & Wim Schoutens
Language: eng
Format: epub
ISBN: 9783030018245
Publisher: Springer International Publishing

Case study 2: DLNA 4 3/8 06/29/49 CoCo

In previous example, the regression model is most of the days better fitting the market. But it seems that on days of extreme unforeseen events, the Greeks model will perform better. In December 2015 extreme stock price market moves were observed for Delta Lloyd bank. Delta Lloyd posted a loss of €533 mn in the first half year of 2015 due to higher-than-expected sensitivity to market volatility. The decline in asset values, stemming from increased interest rates in the second quarter, was only partly offset by a decline in the value of liabilities. Market volatility hurt Delta Lloyd’s economic capital ratio, which fell below its target range. Delta Lloyds stock market experienced a huge drop by the end of August 2015. Since this issuer had no CoCo bonds outstanding, a bond of this issuer with similar features as a CoCo will be observed. We investigate the DLNA 4 3/8 06/29/49 bond price sensitivity as if it was a contingent convertible bond.

In general the model performance is the same as in previous example of one of Societe General CoCos. For example during the same period as in the previous example, the standard regression model does seem to fit best the market price moves (Fig. 3.5).

On August 24, 2015, Delta Lloyds share price falls most ever as loss raises capital concerns. The stock market of Delta Lloyd had a return of –9% over the weekend as shown in Fig. 3.5a and b. In Fig. 3.5 we observe that the Greeks model does now fit this extreme drop quite well compared to the regression model. The regression model does only denote a small drop around 0.5 units whereas the model based on the Greeks and the betas estimates the loss by –3.10. The actual CoCo market dropped by 2.39 units. On August 27, 2015 Delta Lloyds stock market recovers fast with an increase of 2.80%. This extreme impact on the CoCo market is again better fitted by the Greeks model with the beta coefficients using the Eurostoxx 50, iTraxx index and the interest rates as inputs.

Fig. 3.5Model performances for DLNA 4 3/8 06/29/49

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.