Convertible Bond Study with Jump-Diffusion

This paper presents a model for pricing convertible bond. The node relies on the probability distribution of a default jump rather than the default jump itself. In a typical convertible bond arbitrage strategy, the arbitrageur entails purchasing a convertible bond and selling the underlying stock to create a delta neutral position. Delta neutral hedging is great for uncertain stocks that are expected to make huge breakouts in either direction. Since convertible bonds are issued mainly by start-up or small companies, the chance of a large movement in either direction is very likely. Even for very small movements in the underlying stock price, profits can still be generated from the yield of the convertible bond and the interest rebate for the short position.