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Mathematical modeling of Contingent Convertible bonds(CoCo) pricing: A case study of Bank Mellat.
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Mahdi Keikha *1   , Kamran Salmani Qaraei2 |
1- Allameh Tabataba'i University
2- Science & Research Branch, Tehran |
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Abstract: (249 Views) |
Abstract
The 2008 financial crisis exposed the structural and regulatory weaknesses of the banking system, leading to the adoption of stricter regulatory frameworks such as Basel III regarding capital adequacy and structural reforms in bank debt. Banks were required to comply with these changes; however, Iranian banks still have a significant gap compared to these standards and continue to face challenges such as low capital adequacy and a traditional debt structure largely dependent on demand deposits. Although this structure had previously met the financial needs of the economy by imposing inflation, its inefficiency in the current inflationary conditions has become increasingly evident, resulting in reduced resilience of the banking system. Therefore, this study aims to improve capital adequacy, diversify the debt structure of Iranian banks, and enhance their resilience to potential crises by mathematically modeling and pricing Contingent Convertible Bonds (CoCo) for Mellat Bank during the period from 2019 to 2024, with semi-annual intervals. In this regard, stochastic processes, such as geometric Brownian motion and credit derivative models, were used to simulate the dynamic behavior of CoCo bonds under different financial conditions by fitting components of the credit triangle. The research findings indicate that issuing CoCo bonds can significantly improve banks' capital adequacy, reduce the transmission of economic shocks, and increase financial stability. Furthermore, sensitivity analysis of key variables shows that the recovery rate and the minimum risk-free interest rate are key factors in the pricing of these bonds. This study provides practical solutions for monetary policymakers and Iranian banks to modernize their debt structures and align more closely with international standards by utilizing CoCo bonds, thus improving their resilience to financial crises.
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Article number: 5 |
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Type of Study: Theoretical Article |
Subject:
Monetary Policy, Central Banking, and the Supply of Money and Credit (E5)
Received: 2025/01/17 | Accepted: 2025/05/25 | Published: 2025/08/6
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