9
$\begingroup$

How can I find the delta of a convertible bond to be used for hedging?

$\endgroup$
  • $\begingroup$ Delta w/r to what, stock price? $\endgroup$ – quant_dev Apr 26 '11 at 18:03
8
$\begingroup$

Well, it takes a little more information than you've provided, but here are links to a pdf and associated excel spreadsheet that should help you answer your question.

$\endgroup$
  • $\begingroup$ I'm not sure how it takes more information, I didn't provide details for a particular bond, because I was looking for a general formula or explanation on its relation to an option's delta. $\endgroup$ – tshauck Apr 26 '11 at 14:51
  • 2
    $\begingroup$ There is no simple formula, as you may gather from the pdf Tangurena gave you. $\endgroup$ – quant_dev Apr 26 '11 at 18:03
4
$\begingroup$

Tangurena's answer and links give the right idea. You can get a rough approximation by finding the conversion price $K$ and using that $K$ as the strike in a standard Black-Scholes option pricer.

In practice, most people work with 3rd party models such as the ones built into Bloomberg, Monis, or Kynex.

$\endgroup$
0
$\begingroup$

To find the delta of a convertible you can apply the basic definition foe the derivative number : lim h->0, P(So+h)-P(So-h)/h, However because a lot of convertible are callable and putable you have to use this formula: P(So+h) - P(So-h) / 2h , with h=0.0001 for instance.

I a not a quant but, the BlackScholes PDE does not work for convertible because the delta hedged portfolio as defined in BS demonstration does not hold for a convertible bond…

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.