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Keywords = callable putable bonds

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28 pages, 951 KB  
Article
Risk Management and Agency Theory: Role of the Put Option in Corporate Bonds
by Manish Tewari and Pradipkumar Ramanlal
J. Risk Financial Manag. 2022, 15(2), 61; https://doi.org/10.3390/jrfm15020061 - 30 Jan 2022
Cited by 3 | Viewed by 5568
Abstract
This study sets out a new methodology to exemplify, through a set of risk metrics called the Greeks, impact of a bond’s structured provisions (e.g., call, put, and conversion options) on its risk characteristics and its propensity for agency conflicts. The methodology is [...] Read more.
This study sets out a new methodology to exemplify, through a set of risk metrics called the Greeks, impact of a bond’s structured provisions (e.g., call, put, and conversion options) on its risk characteristics and its propensity for agency conflicts. The methodology is assessed by applying it to a sample of 159 non-convertible bonds, with time-scheduled call and put provisions issued between 1977 and 2005. A structural contingent-claims valuation model is used to value the bonds and estimate the Greeks. The methodology is used to assess the impact of the call and put provisions on the bond’s credit risk and interest-rate risk, as well as the provisions’ ability to mitigate the agency conflict associated with over-investment, under-investment, asset-substitution, and information asymmetry about the firm’s true risk among stakeholders. The main findings of this study are that the put option plays a key role in reducing credit risk, mitigating agency conflict, and protecting against volatility shocks; conversely, the call option plays a key role in reducing interest-rate risk. The methodology is sufficiently general to apply to bonds and preferred stock with any set of structured provisions. Full article
(This article belongs to the Special Issue Risk Management and Financial Derivatives)
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