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A friend gave me the following reply in terms of dynamic hedging and portfolio management: Quantitative justification Pricing models for a CB are based on holding the CB hedged with a short equity position. The combined portfolio has zero delta. However, it has positive gamma. To see this, consider that delta increases when the probability of conversion ...


An implied correlation $\rho_i(k_1,k_2)$ is a correlation that matches the $(k_1,k_2)$ tranche price $P_{k_1}^{k_2}$ (usually computed under a gaussian or student t copula) $$ C(k_1,k_2,\rho_i(k_1,k_2)) = P_{k_1}^{k_2} $$ For mezzanine tranches, there can sometimes be two different implied correlations matching the tranche price. A base correlation ...

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