Convertible Bonds and Securities
Course Outline
This course explains in detail the broad range of convertible securities and associated applications and trading strategies. Participants will undertake a series of workshops to explain the key ideas including pricing convertible bonds, the incorporation of credit risk, calculating Greeks and simulating trading strategies. Exercises and pricing models are implemented using Excel functions and macros and participants will be able to take away all worked examples.
Who The Course is For
- Traders
- Credit and equity risk managers
- IT
- Middle office
- Quantitative researchers
- Hedge funds
- Portfolio managers
- Structured products desk
- Debt capital markets staff
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Prior Knowledge
- Numerate background (basic)
- Basic knowledge of fixed income and equity products
- Basic knowledge of Microsoft Excel
This
program is eligible for
24 Continuing Education credit hours from the CFA Institute. If you are a
CFA Institute member, CE credit for your participation in this program
will be automatically recorded in your CE Diary.
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Day One
Introduction to convertible securities
- What is a convertible bond?
- Market overview
- Issuers, investors and arbitrageurs
- Legal, regulatory and accounting issues
- Convertible definitions and conversion considerations
- Calls, puts, covenants and busted convertibles
- Sample termsheet
Workshop: Convertible price characteristics from bond to equity and in between
The convertibles market
- Sector, currency and geographic profile
- Why issue a convertible?
- New issue considerations: premium vs yield
- Who buys convertibles and why?
- Impact of calls and puts for issuers and investors
- Death spiral financing
Workshop: Valuing a convertible: the bond + warrant approach
Types of convertible
- Warrants
- Exchangeables
- Mandatory convertibles
- Zero-coupon convertibles
- Reverse convertibles
- LYONS, convertible preferred stock and synthetic convertibles
- Cross-currency products
Workshop: Implementing the payoffs of the different convertible securities
Day Two
Pricing, hedging and trading strategies
Basics of pricing convertible bonds
- Pricing components (interest-rates, equity and credit)
- Simple tree based pricing approach
- The impact of calls and puts
- Handling the complexities (dividends, refixes and cross-currency effects)
Workshop: Building a simple 1-factor pricing model
Risk management and convertible arbitrage
- What is volatility?
- Convertible Greeks – delta, gamma, theta, vega and rho
- Delta hedging and capturing gamma
- Volatility arbitrage
- Bond floor and credit hedging
Workshop: Calculating Greeks and simulating the classic hedging strategy used in convertible arbitrage
Day Three
Credit considerations and capital structure arbitrage
Pricing convertible bonds: the credit component
- Empirical evidence of credit / equity relationship
- The Merton model - linking the equity and credit markets
- Convertible pricing conditions
- Pricing convertibles – valuable insights on credit effects, dilution and conversion
- The pseudo 1-factor convertible pricing approach used by many practitioners
Workshop: Pricing convertibles – the different ways of incorporating credit risk
Capital structure arbitrage
- Why does an arbitrage exist?
- Practical applications of the Merton model (KMVTM and CreditGradesTM)
- Typical trading strategies
- Credit default swaps vs equity
- Senior / subordinated strategies
- Equity default swaps vs credit default swaps
- Capital structure arbitrage, crashes and the break-down of traditional economic relationships
Workshop:
Hedging simulation of classic capital structure arbitrage trade
