Analysis and review of Monte Carlo method for pricing of convertible bonds

Because of their flexibility and complexity, convertible bonds have developed quickly since they were first issued and their pricing has gradually become a challenging job. There has been much international and domestic research about this and many pricing models have been proposed. Because convertible bonds are subject to multi-risks and because of their implied option's strong path-dependence and structure, The Monte Carlo method is increasingly considered to be the favorite for the pricing of convertible bonds. This paper systematically analyzes and reviews the application and further improvement of the Monte Carlo method for the pricing of convertible bonds on the basis of a brief analysis of its principle approaches. The final conclusion of this paper is that the Approaches based on the Least Square Monte Carlo method and improved by control vitiate and other variance reduction technology would be an important and effective method for the pricing of convertible bonds.