At work my colleague asked me questions related to convertible bond. I have never given serious attention to this product apart form my CFA studies.
Today I read about this product's basic structure , its valuation and who are the biggest trader, and why. In layman term it is a bond with an option to subscriber to convert bond into equity share of issuer, at predefined price and conversion ratio.
Convertible bond = Long debt + call option on equity
Convertible bond behave as equity positions when convertible option is deep into the money ,share price is quite high from strike,and it behave as bond when convertible option is deep out of the money , share price is quite low from strike.
This is an very powerful product for investors as it provides principal protection and equity benefit if firm will do good. Historically these instruments have given returns close to equity indexes but with very less volatility ,Convertible Bonds: Stock-like Returns With Less Risk.
Hedge fund uses convertible bonds in combination with short sell of underlying equity to do the gamma trading. Funds short sell more equity when equity price rises because when prices rises than delta of the convertible option increases and they cover some short sale by buying equity while prices of the equity going down because delta of convertible option will be reducing while prices going down. Effectively they are buying low and selling high.
Most hedge fund manger
Convertible arbitrage strategy looks all season strategy but it gets hurt badly in liquidity crisis. New issues of convertible bonds has been decreased since 2006 but demand of these coverts have been going strong. There is more opportunities for convertible bond arbitrager in higher volatility time ,convertible-bond-arbitrage-looks-set-revive-volatility-creates-opportunities.
Today I read about this product's basic structure , its valuation and who are the biggest trader, and why. In layman term it is a bond with an option to subscriber to convert bond into equity share of issuer, at predefined price and conversion ratio.
Convertible bond = Long debt + call option on equity
Convertible bond behave as equity positions when convertible option is deep into the money ,share price is quite high from strike,and it behave as bond when convertible option is deep out of the money , share price is quite low from strike.
This is an very powerful product for investors as it provides principal protection and equity benefit if firm will do good. Historically these instruments have given returns close to equity indexes but with very less volatility ,Convertible Bonds: Stock-like Returns With Less Risk.
Hedge fund uses convertible bonds in combination with short sell of underlying equity to do the gamma trading. Funds short sell more equity when equity price rises because when prices rises than delta of the convertible option increases and they cover some short sale by buying equity while prices of the equity going down because delta of convertible option will be reducing while prices going down. Effectively they are buying low and selling high.
Most hedge fund manger
Convertible arbitrage strategy looks all season strategy but it gets hurt badly in liquidity crisis. New issues of convertible bonds has been decreased since 2006 but demand of these coverts have been going strong. There is more opportunities for convertible bond arbitrager in higher volatility time ,convertible-bond-arbitrage-looks-set-revive-volatility-creates-opportunities.
No comments:
Post a Comment