Convertible Bonds and Securities
"Very good [...] training that enhanced my capital markets knowledge."
Tomasz Podgorski - Investment Banking, Unicredit
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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
Overview of Convertible Securities
Introduction to convertible securities
- What is a convertible bond?
- Market overview
- Convertible definitions and conversion considerations
- Calls, puts, covenants and busted convertibles
- Valuation and hedging
Workshop: Convertible price characteristics from bond to equity and in between, sample termsheet and calculation of key terms
The convertibles market
- Why issue a convertible?
- New issue considerations: premium vs yield
- Who buys convertibles and why?
- Impact of calls and puts for issuers and investors
Analysing convertible bonds
- Suboptimal call policy
- Straight bonds
- Warrants
- Basic convertible price behaviour and sensitivities
Types of convertible
- Overview
- Mandatory convertibles
- Exchangeables
- Reverse convertibles
- Contingent converts (CoCos), cash settlement and boostings earnings
- Refix and FX convertibles
- Dividend protection and other features
Workshop: Implementing the payoffs of the different convertible securities
Additional questions, problem solving and review of the day
Day Two
Pricing Convertible Securities
Analysing convertible securities
- Introduction
- Breaking the convertible into a bond and warrant
- Valuing a straight bond
- Valuing warrants and European options
- Bond + option pricing approach
Workshop: Pricing a convertible using i) bond + call option and ii) parity + put option approaches
Analysing mandatory and reverse convertibles
- Reverse convertible payoff
- Mandatory convertibles – PERCs type
- Mandatory convertibles – PEPs type
Workshop: Pricing mandatory and reverse convertibles using options based approaches
Convertible pricing model
- Overview
- Tree based methodology
- Handling the complexities (dividends, refixes and cross-currency effects)
- Examining the impact of calls (and puts) and refixes
Workshop: Building a simple 1-factor pricing model and comparing to the simple option based approach. Pricing with soft calls and refixes
Convertible pricing model with credit risk
- Blended discount factor approach
- Correct incorporation of default risk
- Empirical evidence of credit / equity relationship
- The pseudo 1-factor convertible pricing approach used by many practitioners
Workshop: Calculating the price of a convertible bond with credit risk
Additional questions, problem solving and review of the day
Day Three
Convertible securities and credit risk
Risk management and convertible arbitrage
- Overview of convertible arbitrage
- Convertible greeks – delta, gamma, theta, vega and rho
- Delta hedging and capturing gamma
- Hedging with options
- Busted convertible hedging
Workshop: Calculating greeks and simulating the classic hedging strategy used in convertible arbitrage
Default probability
- Credit default swaps
- Default and survival probability
- Historical default probabilities
- Implied default probabilities
- Recovery rates
Workshop: Calculating implied default probability
Convertibles and capital structure models
- The Merton model – linking the equity and credit markets
- Pricing behaviour of the Merton model
- A structural convertible model
- Pricing convertibles – insights on credit effects, dilution and conversion
Workshop: Pricing a convertible with a structural model : looking at the impact of dilution, credit and volatility
Capital structure arbitrage
- Credit impact on greeks
- Why does an arbitrage exist?
- Practical applications of the Merton model (KMVTM and CreditGradesTM)
- Typical trading strategies
- Capital structure arbitrage at the portfolio level
