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The Handbook of Convertible Bonds: Pricing, Strategies and Risk Management

The Handbook of Convertible Bonds Pricing, Strategies and Risk Management

  • Author:
  • Publisher: John Wiley & Sons
  • ISBN: 9780470689684
  • Published In: February 2011
  • Format: Hardback , 396 pages
  • Jurisdiction: International ? Disclaimer:
    Countri(es) stated herein are used as reference only
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    This is a complete guide to the pricing and risk management of convertible bond portfolios. Convertible bonds can be complex because they have both equity and debt like features and new market entrants will usually find that they have either a knowledge of fixed income mathematics or of equity derivatives and therefore have no idea how to incorporate credit and equity together into their existing pricing tools.

    Part I of the book covers the impact that the 2008 credit crunch has had on the markets, it then shows how to build up a convertible bond and introduces the reader to the traditional convertible vocabulary of yield to put, premium, conversion ratio, delta, gamma, vega and parity. The market of stock borrowing and lending will also be covered in detail. Using an intuitive approach based on the Jensen inequality, the authors will also show the advantages of using a hybrid to add value - pre 2008, many investors labelled convertible bonds as 'investing with no downside', there are of course plenty of 2008 examples to prove that they were wrong. The authors then go onto give a complete explanation of the different features that can be embedded in convertible bond.

    Part II shows readers how to price convertibles. It covers the different parameters used in valuation models: credit spreads, volatility, interest rates and borrow fees and Maturity.

    Part III covers investment strategies for equity, fixed income and hedge fund investors and includes dynamic hedging and convertible arbitrage.

    Part IV explains the all important risk management part of the process in detail.

    This is a highly practical book, all products priced are real world examples and numerical examples are not limited to hypothetical convertibles. It is a must read for anyone wanting to safely get into this highly liquid, high return market.

     
     
  • Reading this Book.

    Preface.

    Acknowledgements.

    PART I THE CONVERTIBLES MARKET.

    1 Terminology.

    1.1 The Payoff.

    1.2 Advantages of Convertibles.

    1.3 Basic Terminology.

    1.4 Advanced Terminology.

    1.5 Legal Terminology.

    1.6 Analytics and Hedge Ratios.

    2 Convertible Bond Anatomy.

    2.1 Payoff to the Investor.

    2.2 Payoff Graph.

    2.3 Boundary Conditions.

    2.4 Effect of the Call Protection.

    2.5 Announcement Effect.

    3 Convertible and Hybrid Structures.

    3.1 Preferred Shares.

    3.2 Convertible Bond Option.

    3.3 Reverse Convertible.

    3.4 Perpetuals.

    3.5 Cross-Currency.

    3.6 Mandatory.

    3.7 Cashout Option.

    3.8 Exchangeable.

    3.9 Dividend Entitlement.

    4 Convertible Bonds Market.

    4.1 The Convertible Universe.

    4.2 The Prospectus.

    4.3 The Investors.

    4.4 Market Participants.

    4.5 New Issuance.

    PART II PRICING.

    5 The Road to Convexity.

    5.1 Break-Even Analysis.

    5.2 Discounted Yield Advantage.

    5.3 Convexity.

    5.4 Jensen's Inequality.

    5.5 Time Decay.

    5.6 Double-Signed Gamma.

    5.7 Colour.

    5.8 First Steps Using Convexity.

    6 Basic Binomial Trees.

    6.1 Models.

    6.2 The Basic Ingredients.

    6.3 A Primer in Stochastic Calculus.

    6.4 Elementary Credit Model.

    6.5 Binomial Equity Models.

    6.6 Pricing Convertibles Using Binomial Trees.

    6.7 Credit Spread Modelling in Binomial Trees: A Practitioner's Approach.

    6.8 Conclusions.

    7 Multinomial Models.

    7.1 Convergence of the Binomial Model.

    7.2 Moments.

    7.3 Multinomial Models.

    7.4 Trinomial Model.

    7.5 Heptanomial Model.

    7.6 Further Optimization.

    7.7 Other Refinements.

    7.8 Resets in Multinomial Models.

    8 Ascots.

    8.1 Risk Components of a Convertible.

    8.2 Asset Swaps.

    8.3 Ascots.

    8.4 Advantages for the Credit Buyer.

    8.5 Advantages for the Ascot Buyer.

    8.6 Pricing of Ascots.

    8.7 Ascot Greeks.

    8.8 CB Warrants.

    PART III RISK MANAGEMENT AND STRATEGIES.

    9 Measuring the Risk.

    9.1 Portfolio Risk.

    9.2 A Portfolio in Trouble.

    9.3 Risk Categories.

    9.4 Coherent Risk Measures.

    9.5 Option Greeks.

    9.6 Fixed Income Measures.

    9.7 Cross Greeks.

    9.8 Speed and Colour.

    9.9 VaR and Beyond.

    9.10 Back Testing.

    9.11 Stress Testing.

    10 Dynamic Hedging.

    10.1 Hedge Instruments.

    10.2 Delta Hedging.

    10.3 Volatility.

    10.4 Gamma Trading.

    10.5 The Variance Swap.

    11 Monte Carlo Techniques for Convertibles.

    11.1 Adding More Realism.

    11.2 Monte Carlo Method.

    11.3 American Monte Carlo.

    References.

    Index.

  • Jan De Spiegeleer (Geneva, Switzerland) is Head of Risk Management at Jabre Capital Partners, a Geneva-based hedge fund. He developed an extensive knowledge of derivatives pricing, hedging and trading while working for KBC Financial Products in London, where he was Managing Director of the equity derivatives desk. Prior to his financial career, Jan worked for ten years as an officer in the Belgian Army, and served in Iraq.

    Wim Schoutens (Leuven, Belgium) is a research professor in financial engineering in the Department of Mathematics at the Catholic University of Leuven, Belgium. He has extensive practical experience of model implementation and is well known for his consulting work to the banking industry and other institutions. Wim is the author of Lévy Processes in Finance and Lévy Processes in Credit Risk, and co-editor of Exotic Option Pricing and Advanced Lévy Models all published by John Wiley and Sons. He is Managing Editor of the International Journal of Theoretical and Applied Finance and Associate Editor of Mathematical Finance, Quantitative Finance and Review of Derivatives Research.

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