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

Additional questions and review of the course

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