Read e-book online Convertible Arbitrage: Insights and Techniques for PDF

By Nick P. Calamos

ISBN-10: 0471423610

ISBN-13: 9780471423614

Reduce chance and maximize gains with convertible arbitrage
Convertible arbitrage consists of paying for a portfolio of convertible securities-generally convertible bonds-and hedging a section of the fairness threat by way of promoting brief the underlying universal inventory. This more and more well known procedure, that is in particular precious in periods of marketplace volatility, permits participants to extend their returns whereas reducing their dangers. Convertible Arbitrage deals a radical rationalization of this distinct funding technique. jam-packed with in-depth insights from knowledgeable within the box, this complete advisor explores a variety of convertible subject matters. Readers may be brought to numerous versions for convertible research, "the Greeks," in addition to the total diversity of hedges, together with titled and leveraged hedges, in addition to swaps, nontraditional hedges, and choice hedging. they're going to additionally achieve a company realizing of different convertible buildings, using international convertibles in hedging, chance administration on the portfolio point, and buying and selling and hedging dangers. Convertible Arbitrage gets rid of any confusion by way of essentially differentiating convertible arbitrage method from different hedging strategies comparable to long-short fairness, merger and acquisition arbitrage, and fixed-income arbitrage.
Nick Calamos (Naperville, IL) oversees examine and portfolio administration for Calamos Asset administration, Inc. given that 1983 his event has situated on convertible securities funding. He got his undergraduate measure in economics from Southern Illinois college and an MS in finance from Northern Illinois college.

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Extra resources for Convertible Arbitrage: Insights and Techniques for Successful Hedging

Sample text

6 The Convertible Bond. 7 Convertible Structure and Risk-Reward Tradeoff. income value of the convertible. The investment value is equal to the present value of the coupon interest payments plus the principal value discounted at the appropriate credit-adjusted rate, where: IV = ∑t =1 CPN /(1 + k)t + par /(1 + k)n n CPN = coupon, par = par value, k = credit adjusted discount rate, n = number of periods to maturity, t = current time. The fixed-income value (investment value) will rise or fall in accordance to changes in either interest rates or credit-quality ratings.

The binomial model allows for stock-price correlated credit spreads as well as stochastic credit spreads in the convertible valuation process. 4 demonstrates how the binomial model allows for the range of credit discount rates in conjunction with the convertible’s credit risk. The no-credit-risk portion of the convertible curve has a discount rate equal to the risk-free rate of 7 percent. Here, the convertible is deep in the money and in effect the risk of default is zero. On the other end of the spectrum, the credit-impaired discount rate of 19 percent can be found at very low stock prices with the convertible well out of the money and the risk of default at a very high level.

Mandatory convertible securities are popular with equity investors and equity-income funds. They also provide some very good hedge opportunities for the arbitrage community because of price discrepancies that occur and the high degree of certainty at maturity payoff. Chapter 6 will present a detailed discussion about hedging mandatory convertibles with stock or options. 15 shows the DECS risk-reward profile at maturity. Because of the multiple options long and short, it is helpful to see the at maturity payoff structure to understand the dynamics of the security.

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Convertible Arbitrage: Insights and Techniques for Successful Hedging by Nick P. Calamos

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