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8

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.


5

The major difference is that the equity option embedded in a convertible bond is not detachable from the convert, so that you have to value the bond and the embedded option together. If you want to make a direct comparison with a detachable warrant, you can think of the the embedded option in a convertible bond as having a strike price equal to the value of ...


4

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.


4

I can't answer your question about the data, since my sources for data like that are Reuters and Bloomberg, neither of which are cheap. For testing trading strategies, I'll separate them into three camps. For 'simple' optimization schemes, RMetrics fPortfolio can likely do the trick. This would be for weight-based asset allocation. RMetrics also has some ...


4

Let $V(t, r_t, S_t)$ be the convertible bond price at time $t$, where \begin{align*} dS_t &= S_t(r_t dt + \sigma dW_t^1)\\ dr_t &=\kappa(\theta-r_t)dt+\Sigma dW_t^2, \end{align*} and where $\{W_t^1, \, t\ge 0\}$ and $\{W_t^2, \, t\ge 0\}$ are two standard Brownian motions with $d\langle W^1, W^2\rangle_t = \rho dt$. Then, \begin{align*} &\ dV(t, ...


3

The maturity of an investment is the end date of the contract. For example, you can buy a bond that pays P*(1+r) one year from now, where P is the price you pay, r is the interest rate, and the day on which it expires (one year from today) is the expiration date. Another example, in the case of options contracts, you buy a contract that gives you the ...


2

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 ...


2

The Theory of Corporate Finance is an academic field that tries to explain theoretically why companies issue the kinds of securities they do. The simplest company, a steady state business that earns say X a year growing at y% a year could be financed with equity and (optionally) debt alone. How then do we explain the great variety of instruments that real ...


2

Both statements are correct. A warrant allows a holder to BUY a stock at a set price. Because there is a specific price, all that is needed is CASH to get the stock. As such, the warrant can be separated from the bond, and someone else could use it. As a result, it is valued separately from an accounting perspective. A convertible bond, on the other hand, ...


2

That company is probably traded on the Hungarian stock exchange in Hungarian forint. You would have to multiply the stock price by the euro/forint rate to find parity. Note that in this case, the bond has a huge coupon (Euribor+5.5%) after the "call date", effectively forcing the call and making the bond a 4% maturing in 2016. There's no real point to ...


2

If you are asking whether it is possible to price path-dependent American options in tree based models, the short answer is yes. You simply construct your tree/grid and evaluate the rules in each node (analogous to what you would do in your MC simulations). These rules can be arbitrarily complex. Note, however, that you can only evaluate them at a discrete ...


2

Unfortunately, convertible bonds are quite complex so you don't have simple formulas or approaches as with vanilla bonds. However, this does not mean you are powerless. You can follow different approaches, for instance: 1) If you have a pricing model for the convertible, you can use the finite difference method (or other techniques) to get any sensitivity. ...


1

Here's my $1/50. Please be free to raise any suggestions. Don't regress the split cashflows respectively as in TF, just regress the whole continuation value instead. When the bond is in the callable period, we'll have to use all paths; Otherwise, when in the convertible period, only consider the paths where conversion value > straight bond value (or should ...


1

The usual approach to deal with path dependency in finite differences/lattices solvers is to capture the path dependency trough one or more auxiliary variable(s) that make the problem non path dependent in the augmented space, and to discretize along these auxiliary variable(s). For instance that's easily done for asian options where the path dependency is ...


1

Negative yields will typically be negative do to the value of option (conversion value + time value). If you subtract out the value of that option as determined by a blackscholes model the remaining value will be the bond component. Using a RATE function will then give you the implied credit spread.


1

Barclays technical introduction to Convertibles is a very good start.


1

In classical structural modeling, we have that the firm asset value $A(t)$ is the fundamental stochastic variable, following an SDE like the one presented by @Dom $$ \frac{dA}{A} = \mu_A d\,t + \sigma_A d\,W $$ The stock price is then itself an option on the asset value at some horizon $T_H$, $$ S_t = S(A(t), \mu_A, \sigma_A, T_H) $$ and the convertible ...


1

The parity in this picture is given as the percentage of the face value. The stock price is given in HUF. I checked the stock price, It reached 16600 in september 2013. The EURHUF that time was something like 299, but we should now the exact time this picture was taken. So we have everything to calculate the parity: $\text{Parity} = \text{Conv Ratio} \cdot ...


1

The above gives you the value of the option in the convertible bond. Next step, look at the price of an exchange-traded option to see what the embedded convertible bond option is worth. That can tell you if the convertible bond is over or under priced - compare the market value of the option to the implied price of the option (scaling prices to the same ...


1

Here is a new paper written by Tim Xiao at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2400101


1

You are mixing terms here. The definition of an "interest rate" is typically a simple interest rate as applies to the Principal of a loan. The unpaid interest rate is not compounded. This is owed at the conclusion of the loan or when converted to debt. Typically rolled into the equity stake. The definition of "discount" is what the convertible debt holder ...


1

If there is no chance of default, and you have an extremely simple set of terms and conditions (T&C) on the bond, then the two are equivalent. In the real world T&C are complex for all bonds currently traded, and default is important. Therefore something closer to the binomial model, which allows the embedded option to disappear in the event of ...


1

Andrew Lo has an analysis documenting the performance of Convertible Bond strategies (see page 13 here). His purpose is to see whether various hedge fund strategies can be replicated by a portfolio of tradeable risk assets. His sample period his 1986-2005.


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