Break up of forign currency convertible bond

edelweiss · July 20th, 2007, 12:31 pm

Is it possible to price a foreign currency convertible bond (FCCB) by breaking into straight bond and option?for example - i tried to break plain vanilla FCCB be broken into straight bond price and option price.I got the bond price which is PV of redemption value. But I am not able to get option price (using balck scholes). I think the problem is to incorporate the fx curve.Is it right to use Strike (in foreign currency) = Bond value * fx rate (not sure current or forward rate) / conversion ratioAny suggestions

Aaron · July 20th, 2007, 11:15 pm

There's no reason to use the FX curve, just value the bond in its native currency, then convert at the spot if you want the price in a different currency.Breaking a convertible into bond plus option is only an approximation.