![]() If it can effectively invest the proceeds of the convertible bond issue in its underlying business, it may be able to thwart the short sellers and even stick them with the losses. The only hope for the company to interrupt the death spiral is to improve its operational results. Enter the Short Sellersįurthermore, traders short the stock in the expectation that the stock price will continue to dive.Įach additional conversion will cause more price drops as the supply of shares increases, causing the process to repeat itself as the stock's price spirals downward. This drop in price may cause more bondholders to convert because the lower share price means that they will receive more shares. However, conversion creates more shares, which dilutes the share price. That means a bondholder will receive $1,500 worth of shares for giving up the $1,000 bond. For example, a bond with a face value of $1,000 may have a convertible value of $1,500. It is important to note that death spirals typically allow buyers to convert the bonds into shares at a fixed conversion ratio in which the buyer has a large premium. A company that seeks death spiral financing probably has no other way to raise money to survive. This type of bond is sometimes issued by a company that desperately needs cash. Theoretically, the death spiral effect can continue until the stock is at or near zero value. A convertible bond can be converted to a certain number of shares. The death spiral effect occurs as more and more fixed-value convertible bond owners convert their bonds into stocks as their value drops lower and lower.Ī company that issues this type of convertible bond is probably desperate for cash to stay afloat. A type of convertible bond that can result in the creation of ever-increasing amounts of stock shares, driving the respective stock price down in a dramatic fashion (which at times can lead to an entity’s ultimate downfall). But this process by definition increases the number of shares in the market, and that forces prices even lower. However, issuing these bonds creates more shares outstanding when they are converted, which results in a drop in the share price. The convertible bonds give the investor a right to buy shares in the company at a low, agreed-upon price. They can get more shares of stock when they make the conversion. A loan that investors give to a publicly-traded company in exchange for convertible bonds. However, a stock price decline motivates the owner of fixed value convertible bonds. The type of bond that is called death spiral debt, however, converts into a fixed value paid in shares.Īs a stock's price increases substantially, investors in conventional convertible shares are likely to seize the opportunity to convert their bonds into fast-growing stocks. Hedging the credit risk by making used of options on convertible bonds.As noted, a conventional convertible bond can be converted to a fixed number of shares. This is an introduction to the different risk measures that can be applied to convertiblesĬonvertible Bond: Advanced Instrument FeaturesĮxtended example on how ratchets should be evaluated whenever the convertible gets involved in a takeover situation Volatility contracts such as VIX and their possible pitfalls will be explained as well This section will examine with the way to use listed options to deal with some of the volatility risk embedded within a convertible bond. This section will deal with the impact of a frequent rebalancing of the hedge in low and high volatile markets It will be shown how any delta hedge changes the risk profile of the bond Starting from a real world example, the delta hedging of a convertible bond portfolio will be explained. ![]() Risk Management and Hedging of a Convertible Bond Portfolio This part of the course introduces the delegates to the different mainstream models to value convertible bonds. All of the knowledge build up in the previous session is going to be embedded in this workshop. ![]() This will be done by making use of interactive spread sheet-based models. ![]() Starting from these sample prospectuses, the participant in the course will have to set up a valuation and initial hedge for each of these real-world examples. Based on several real-world prospectuses, the delegates will set-up a convertible bond from scratch dealing with the different instrument specific features: issuer calls, investor puts, etc. This part of the course is exercise driven. The negative convexity of this feature can be a real trap for the convertible bond arbitrageur Attention is given to the nomenclature: Convertible bonds come with their own language and conventions which are different from the traditional derivatives language: conversion premium, parity, conversion price, etc.Ī deeper understanding will be provided regarding the reset feature. Basic introduction to what a convertible bond is and what its key elements are. ![]()
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