Critical Analysis of the Binomial-Tree approach to Convertible Bonds in the framework of Tsiveriotis-Fernandes model

TL;DR

This paper critically examines the Binomial-tree method for pricing and managing convertible bonds within the Tsiveriotis-Fernandes model, highlighting significant limitations and drawbacks in its application.

Contribution

It provides a detailed analysis revealing the shortcomings of the Binomial-tree approach in the specific context of the Tsiveriotis-Fernandes model for convertible bonds.

Findings

Binomial-tree approach has serious drawbacks for convertible bonds

Identifies limitations in pricing and risk assessment methods

Highlights issues in delta-hedging and Greeks calculation

Abstract

In the present paper we show that the Binomial-tree approach for pricing, hedging, and risk assessment of Convertible bonds in the framework of the Tsiveriotis-Fernandes model has serious drawbacks. Key words: Convertible bonds, Binomial tree, Tsiveriotis-Fernandes model, Convertible bond pricing, Convertible bond Greeks, Convertible Arbitrage, Delta-hedging of Convertible bonds, Risk Assessment of Convertible bonds.