During this intensive 2-day course you will learn about:
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Detailed examination of actual convertible bond term sheets
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Pricing and valuing CBs using the latest numerical models
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Valuing a call strip
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Analysing refix bonds
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Detailed look at a range of mandatory convertible bond structures
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Identification of arbitrages between the various inter-locking markets
Course Background
In periods of economic recession, convertible bonds are often issued. Why? They provide investors with a known coupon plus the potential gain if the equity market does rebound. Issuers also like them because, due to the embedded equity option, they are cheaper than other forms of debt. In the first half of 2009, issuance was over 50% higher than in 2008. This course looks at the market for CBs, and how it works, working through actual term sheets. The modelling of CBs is considered in detail, looking at both simple analytic approaches and marketstandard methods using numerical tree and simulation. This section is backed by some computer-based exercises. Finally, the course considered other forms of CBs, such as refix and mandatory convertibles, as well as related structures such as warrant bonds and exchangeables.
What will you learn
- How to read the term sheet of a convertible bondHow to analyse a convertible bond
- How to model a bond with and without a call strip using numerical methods
- How to look for arbitrages between CBs, CDSs, normal corporate bonds, and equity
- What are extensions to convertible bonds: resets and mandatory convertibles with a range of embedded options
- How to measure the risk of a convertible bond
Who should attend
DAY 1
Overview of the CB market:
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What is a CB
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Who are the main issuers, and why?
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Who are the main investors, and why?
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Some statistics about the size of the market, and its growth
A detailed examination of a CB issue:
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First look at the term sheet – what are the main components
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How does conversion work – conversion period, price and ratio, issue premium, impact of dividends, issuance of shares, accrued interest, dilution, and other effects
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When is the optimal time to convert – from the investor’s perspective
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Second look at the term sheet - inclusion of call and put strips
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When is the optimal time to call – from the issuer’s perspective
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When is the optimal time to put – from the investor’s perspective
How to model a CB:
Computer-based exercise: pricing a simple CB
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More complex analytic models – demonstration of Ramanlal’s model
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Why these approaches don’t really work
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Numerical approaches – using an equity tree
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Building the equity tree with continuous dividends
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Building the tree with discrete dividends
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Pricing a CB off a tree
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What is the appropriate rate for discounting?
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Pricing a CB off two trees
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Incorporating calls and puts on the tree
Computer-based exercise: pricing a CB off a tree – valuing the call strip
DAY 2
CB arbitrage:
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Links to the normal corporate bond market
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Links to the swap market
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Links to the equity (and equity option) market
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Links to the credit market
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CB as a pivotal instrument
Extensions to normal CB:
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Refix (or reset) clauses – with examples
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How to price a refix CB
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Modifying the tree
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Similar structures - exchangeable
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Similar structures – warrant bonds
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Similar structures – bank hybrid debt
Mandatory convertibles:
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Examples of MCs
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Limited appreciation MCs
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High yield MCs
Each structure will be analysed, deconstructed into its basic components, and priced. There will be two computer-based exercises.
Risk management of CBs
Assessment of implied volatility
Measuring the risk parameters – interest rate, equity, credit
Second-order cross effects – introducing correlation effects
Managing the risk by hedging
Computer-based exercise: measuring the risk characteristics of a CB
Summary of course
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Dr. Richard Flavell
Richard Flavell
Dr Richard Flavell is a consultant in the financial services industry. Until recently, he was Director of Financial Engineering at Lombard Risk Systems, one of the leading providers of derivative trading systems around the world. In this role he led a team responsible for the mathematical development of Lombard’s derivative trading and risk management systems. At the same time, he also undertook extensive client/product training and consultancy projects.
Prior to his role at Lombard Risk, Dr Flavell was Head of Financial Engineering at ANZ Merchant Bank in London, and was Reader in Finance at The Management School, Imperial College, which is part of the University of London. He has worked with many banks and financial institutions around the world, advising them on their derivative and risk management activities. Dr Flavell has an international reputation for his expertise in swaps, other derivatives and risk management.
Dr Flavell has also published widely in both academic and professional literature, his most recent book on Swaps and other Derivatives was published in December 2009, and he is currently writing a book on bank risk management. His approach to training is structured and practical. He has extensive experience and success in teaching both recent entrants to the derivatives markets and risk management, as well as highly experienced technical experts and market participants.
Courses run by this instructor
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This course has now expired please email us to find out when the course will next be running.