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Convertible Bonds and Securities

Day One

Introduction and course outline

Convertible bond primer

  • Convertible Bonds
  • Basic introduction to what convertible bond is and its key elements. Nomenclature: Convertible bonds come with their own language and conventions which is different from the traditional derivatives language: conversion premium, parity, conversion price, etc.
  • Contingent Convertibles (CoCos)
  • A short introduction into Contingent Capital and CoCo bonds
  • Reverse Convertibles: characteristics and application
  • Credit Default Swaps

Workshop: Reverse Convertible (RC) modelling and convertible bond (CB) anatomy. Structuring CBs and RCs using Excel spreadsheets

Basic Valuation Models – a hands-on introduction to CB pricing

  • Lattice Models (binomial, trinomial and multinomial)
  • Black and Scholes
  • Implied Volatility
  • Heston

Workshop: Monte Carlo pricing (Heston – Black and Scholes): a fast route to understand and price a new issue of complex CB setups

Day Two

Cocos bond modelling (I)

  • Contingent Convertibles recap
  • Barrier Models
  • Structural Models
  • Credit Triangle

This section is dedicated to work out the pricing and risk of contingent convertibles using different techniques

Workshop: CoCo structuring, design and pricing. Handling the dynamics of Cocos and the death-spiral effect embedded within this asset class

Convertible bonds: anatomy, market and modelling (II)

  • Instrument features (RESETS) - Understanding the reset feature and negative convexity
  • Convertible bond market - Overview of the different parties involved in the issuing and trading of convertible bonds
  • Pricing in practice

Workshop: Pricing convertible bonds - valuation and initial hedge using real-world examples

Day Three

Convertible bonds: advanced features

  • Ratchets
  • Evaluating ratchets in a takeover situation
  • Dividend Protection
  • Convertible Bond Options (ASCOTS). Hedging credit risk with ASCOTS

Workshop: American Monte Carlo in a real world example

Risk management and hedging of a convertible bond portfolio

  • Delta hedging. Changes in the risk profile of the bond
  • Gamma trading. Impact of frequent rebalancing of the hedge in low and high volatility markets
  • Credit and Volatility hedges
  • Sensitivity Analysis. Different risk measures that can be applied to convertibles

Workshop: Discussion and round table