The handbook of convertible bonds : pricing, strategies and risk management

398 Pages·2011·8.06 MB·English

by  Jan De Spiegeleer

P1:TIX
fm JWBK498-Schoutens December22,2010 12:53 Printer:Yettocome
P1:TIX
fm JWBK498-Schoutens December22,2010 12:53 Printer:Yettocome
The Handbook of Convertible Bonds
i
P1:TIX
fm JWBK498-Schoutens December22,2010 12:53 Printer:Yettocome
ForothertitlesintheWileyFinanceseries
pleaseseewww.wiley.com/finance
ii
P1:TIX
fm JWBK498-Schoutens December22,2010 12:53 Printer:Yettocome
The Handbook of Convertible Bonds
Pricing, Strategies and Risk Management
Jan De Spiegeleer and Wim Schoutens
A John Wiley and Sons, Ltd., Publication
iii
P1:TIX
fm JWBK498-Schoutens December22,2010 12:53 Printer:Yettocome
Thiseditionfirstpublished2011
(cid:1)C 2011JohnWiley&Sons,Ltd
Registeredoffice
JohnWiley&SonsLtd,TheAtrium,SouthernGate,Chichester,WestSussex,PO198SQ,UnitedKingdom
Fordetailsofourglobaleditorialoffices,forcustomerservicesandforinformationabouthowtoapplyfor
permission to reuse the copyright material in this book please see our website at www.wiley.com.
Therightoftheauthortobeidentifiedastheauthorofthisworkhasbeenassertedinaccordancewiththe
Copyright,DesignsandPatentsAct1988.
Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted,in
anyformorbyanymeans,electronic,mechanical,photocopying,recordingorotherwise,exceptaspermittedbythe
UKCopyright,DesignsandPatentsAct1988,withoutthepriorpermissionofthepublisher.
Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmaynotbe
availableinelectronicbooks.
Designationsusedbycompaniestodistinguishtheirproductsareoftenclaimedastrademarks.Allbrandnamesand
productnamesusedinthisbookaretradenames,servicemarks,trademarksorregisteredtrademarksoftheir
respectiveowners.Thepublisherisnotassociatedwithanyproductorvendormentionedinthisbook.This
publicationisdesignedtoprovideaccurateandauthoritativeinformationinregardtothesubjectmattercovered.It
issoldontheunderstandingthatthepublisherisnotengagedinrenderingprofessionalservices.Ifprofessional
adviceorotherexpertassistanceisrequired,theservicesofacompetentprofessionalshouldbesought.
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
ISBN 978-0-470-68968-4
Typesetin10/12ptTimesbyAptaraInc.,NewDelhi,India
PrintedinGreatBritainbyCPIAntonyRowe,Chippenham,Wiltshire
iv
P1:TIX
fm JWBK498-Schoutens December22,2010 12:53 Printer:Yettocome
ToKlaartje,Charlotte,Pieter-JanandWillem
—Jan
ToEthel,JenteandMaitzanne
—Wim
v
P1:TIX
fm JWBK498-Schoutens December22,2010 12:53 Printer:Yettocome
vi
P1:TIX
fm JWBK498-Schoutens December22,2010 12:53 Printer:Yettocome
Contents
ReadingthisBook xiii
Preface xv
Acknowledgements xvii
PARTI THECONVERTIBLESMARKET 1
1 Terminology 3
1.1 ThePayoff 3
1.2 AdvantagesofConvertibles 4
1.2.1 FortheIssuer 5
1.2.2 FortheInvestor 8
1.3 BasicTerminology 13
1.4 AdvancedTerminology 17
1.5 LegalTerminology 20
1.6 AnalyticsandHedgeRatios 21
2 ConvertibleBondAnatomy 25
2.1 PayofftotheInvestor 25
2.2 PayoffGraph 26
2.2.1 Example 30
2.3 BoundaryConditions 31
2.3.1 BondFloor 32
2.3.2 Parity 33
2.3.3 InvestmentPremium 33
2.3.4 ConversionPremium 34
2.4 EffectoftheCallProtection 35
2.5 AnnouncementEffect 35
2.5.1 Dilution 41
2.5.2 ArbitrageActivity 41
vii
P1:TIX
fm JWBK498-Schoutens December22,2010 12:53 Printer:Yettocome
viii Contents
3 ConvertibleandHybridStructures 43
3.1 PreferredShares 43
3.2 ConvertibleBondOption 45
3.3 ReverseConvertible 45
3.4 Perpetuals 46
3.5 Cross-Currency 46
3.6 Mandatory 48
3.6.1 PERCS 48
3.6.2 PEPS 48
3.7 CashoutOption 51
3.8 Exchangeable 51
3.9 DividendEntitlement 52
4 ConvertibleBondsMarket 55
4.1 TheConvertibleUniverse 55
4.1.1 CreditRating 55
4.1.2 ConvertibleType 56
4.1.3 ConvertibleCategory 56
4.1.4 Maturity 57
4.1.5 Region 57
4.1.6 144A 57
4.2 TheProspectus 58
4.3 TheInvestors 58
4.3.1 OutrightInvestors 58
4.3.2 ConvertibleBondArbitrageurs 59
4.3.3 Example 60
4.3.4 Conclusions 62
4.4 MarketParticipants 62
4.4.1 LeadManager 63
4.4.2 Trustee 63
4.4.3 PayingAgent 64
4.4.4 MarketMakers 64
4.5 NewIssuance 64
PARTII PRICING 67
5 TheRoadtoConvexity 69
5.1 Break-EvenAnalysis 69
5.1.1 DollarMethod 70
5.1.2 EquityMethod 70
5.2 DiscountedYieldAdvantage 72
5.3 Convexity 74
5.4 Jensen’sInequality 75
5.5 TimeDecay 77
5.6 Double-SignedGamma 79
5.7 Colour 80