I'm learning the jump diffusion model used to price a convertible bond, and got the following stochastic differential equation under risk neutral measure:

$$dS = (r+\lambda*p)Sdt + \sigma*SdW+Sdq$$

$\lambda$ is intensity of default

$dq$ is a Poisson process used to model default

$p$ is stock prices drop amount upon default

Assume we have two cases:

  1. stock price drops 30% upon default, $p$ is 30%
  2. stock price drops 50% upon default, $p$ is 50%

I know the convertible bond price under the second assumption should be higher since its drift is higher, what about the Greeks between these two assumptions, the second assumption creates higher Greeks (Ex. delta)?


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.