An Economic Analysis of the Japanese Reverse Exchangeable Market

10.6292/AFPF.2011.04.07

Rodrigo Hernández；Wayne Y. Lee；Pu Liu

Reverse exchangeable ； Discount certificate ； Knock-in ； Knock-out ； Structured products ； Callable bonds ； Bermudan callable bonds

Advances in Financial Planning and Forecasting

4期（2011 / 03 / 01）

165 - 197

英文

In this paper we provide economic and empirical analyses of the Japanese reverse exchangeable bond market. We make a detailed survey of the ￥ 1.4 trillion Japanese-Yen (approximately US$ 12.3 billion) denominated market for 3,985 issues of fixed-coupon, single-asset reverse exchangeable bonds issued between June 1999 and December 2006. We examine how callability features were introduced in the design of the bonds. We decompose the reverse exchangeable bonds into put options and zero coupon bonds and calculate the profits in the primary market for issuing such bonds. The results suggest significant positive profits for the issuing financial institutions. We also present a multidimensional classification of reverse exchangeable bonds based on factors such as the coupon payments, number of underlying assets, callability features, and the type of options.

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