Convertible Bonds: Issuing, Pricing and Investing

This course explains in detail the broad range of convertible securities and associated applications and trading strategies.

Participants will undertake a series of workshops to explain the key ideas including pricing convertible bonds, the incorporation of credit risk, handling corporate events such as ratchets, calculating Greeks and simulating trading strategies. Contingent Convertibles are also covered extensively.

Workshops are built around real world convertible bond examples where participants will work their way through several prospectuses. The course also provides every participant with hands-on application of recent models to price convertibles based on Monte Carlo techniques. Exercises and pricing models are implemented using Excel functions and macros and participants will be able to take away all worked examples.

• Traders
• Credit and equity risk managers
• IT
• Middle office
• Quantitative researchers
• Hedge funds
• Portfolio managers
• Structured products desks
• Debt capital markets staff

• Numerate background (basic)
• Basic knowledge of fixed income and equity products
• Basic knowledge of Microsoft Excel

Convertible Bond Primer

Convertible Bonds

• Basic introduction to what convertible bond is and its key elements. Nomenclature: Convertible bonds come with their own language and conventions which is different from the traditional derivatives language: conversion premium, parity, conversion price, etc.

Contingent Convertibles (CoCos)

• A short introduction into Contingent Capital and CoCo bonds
• Reverse Convertibles: characteristics and application
• Credit Default Swaps

Workshop: Reverse Convertible (RC) modelling and convertible bond (CB) anatomy. Structuring CBs and RCs using Excel spreadsheets

Basic Valuation Models – A Hands-on Introduction to CB Pricing

• Lattice Models (binomial, trinomial and multinomial)
• Black and Scholes
• Implied Volatility
• Heston

Workshop: Monte Carlo pricing (Heston – Black and Scholes): a fast route to understand and price a new issue of complex CB setups

Cocos Bond Modelling (I)

• Contingent Convertibles recap
• Barrier Models
• Structural Models
• Credit Triangle

This section is dedicated to work out the pricing and risk of contingent convertibles using different techniques

Workshop: CoCo structuring, design and pricing. Handling the dynamics of Cocos and the death-spiral effect embedded within this asset class

Convertible Bonds: Anatomy, Market and Modelling (II)

• Instrument features (RESETS) - Understanding the reset feature and negative convexity
• Convertible bond market - Overview of the different parties involved in the issuing and trading of convertible bonds
• Pricing in practice

Workshop: Pricing convertible bonds - valuation and initial hedge using real-world examples

Convertible Bonds: Advanced Features

• Ratchets
• Evaluating ratchets in a takeover situation
• Dividend Protection
• Convertible Bond Options (ASCOTS). Hedging credit risk with ASCOTS

Workshop: American Monte Carlo in a real world example

Risk Management and Hedging of a Convertible Bond Portfolio

• Delta hedging. Changes in the risk profile of the bond
• Gamma trading. Impact of frequent rebalancing of the hedge in low and high volatility markets
• Credit and Volatility hedges
• Sensitivity Analysis. Different risk measures that can be applied to convertibles

Workshop: Discussion and round table