The Handbook of Convertible Bonds -- Contents -- Reading this Book -- Preface -- Acknowledgements -- PART I THE CONVERTIBLES MARKET -- 1 Terminology -- 1.1 The Payoff -- 1.2 Advantages of Convertibles -- 1.2.1 For the Issuer -- 1.2.2 For the Investor -- 1.3 Basic Terminology -- 1.4 Advanced Terminology -- 1.5 Legal Terminology -- 1.6 Analytics and Hedge Ratios -- 2 Convertible Bond Anatomy -- 2.1 Payoff to the Investor -- 2.2 Payoff Graph -- 2.2.1 Example -- 2.3 Boundary Conditions -- 2.3.1 Bond Floor -- 2.3.2 Parity -- 2.3.3 Investment Premium -- 2.3.4 Conversion Premium -- 2.4 Effect of the Call Protection -- 2.5 Announcement Effect -- 2.5.1 Dilution -- 2.5.2 Arbitrage Activity -- 3 Convertible and Hybrid Structures -- 3.1 Preferred Shares -- 3.2 Convertible Bond Option -- 3.3 Reverse Convertible -- 3.4 Perpetuals -- 3.5 Cross-Currency -- 3.6 Mandatory -- 3.6.1 PERCS -- 3.6.2 PEPS -- 3.7 Cashout Option -- 3.8 Exchangeable -- 3.9 Dividend Entitlement -- 4 Convertible Bonds Market -- 4.1 The Convertible Universe -- 4.1.1 Credit Rating -- 4.1.2 Convertible Type -- 4.1.3 Convertible Category -- 4.1.4 Maturity -- 4.1.5 Region -- 4.1.6 144A -- 4.2 The Prospectus -- 4.3 The Investors -- 4.3.1 Outright Investors -- 4.3.2 Convertible Bond Arbitrageurs -- 4.3.3 Example -- 4.3.4 Conclusions -- 4.4 Market Participants -- 4.4.1 Lead Manager -- 4.4.2 Trustee -- 4.4.3 Paying Agent -- 4.4.4 Market Makers -- 4.5 New Issuance -- PART II PRICING -- 5 The Road to Convexity -- 5.1 Break-Even Analysis -- 5.1.1 Dollar Method -- 5.1.2 Equity Method -- 5.2 Discounted Yield Advantage -- 5.3 Convexity -- 5.4 Jensen's Inequality -- 5.5 Time Decay -- 5.6 Double-Signed Gamma -- 5.7 Colour -- 5.8 First Steps Using Convexity -- 5.8.1 A Fixed Income Investor -- 5.8.2 An Equity Investor -- 6 Basic Binomial Trees -- 6.1 Models -- 6.2 The Basic Ingredients.

6.3 A Primer in Stochastic Calculus -- 6.3.1 Stochastic Equations -- 6.3.2 Itō's Lemma -- 6.3.3 Shares as Generalized Wiener Processes -- 6.3.4 Shares as a Log Process -- 6.3.5 Linking Both -- 6.4 Elementary Credit Model -- 6.4.1 Probabilities -- 6.4.2 Recovery Rate -- 6.4.3 Credit Triangle -- 6.5 Binomial Equity Models -- 6.5.1 Introduction -- 6.5.2 Binomial Tree -- 6.5.3 Unconditional Default Risk in the Binomial Tree -- 6.5.4 Adding Conditional Default Risk -- 6.5.5 Alternative Ways to Incorporate Credit Risk -- 6.6 Pricing Convertibles Using Binomial Trees -- 6.7 Credit Spread Modelling in Binomial Trees: A Practitioner's Approach -- 6.8 Conclusions -- 7 Multinomial Models -- 7.1 Convergence of the Binomial Model -- 7.1.1 Distribution Error -- 7.1.2 Non-linearity Error -- 7.2 Moments -- 7.3 Multinomial Models -- 7.4 Trinomial Model -- 7.4.1 Solving Moment-Matching Equations -- 7.4.2 Alternative Trinomial Models -- 7.5 Heptanomial Model -- 7.5.1 Solving Moment-Matching Equations -- 7.5.2 Calculation Time -- 7.6 Further Optimization -- 7.6.1 Smoothing -- 7.6.2 Adaptive Mesh Method -- 7.6.3 Truncation -- 7.6.4 Richardson Extrapolation -- 7.6.5 Bardhan-Derman-Kani-Ergener Correction -- 7.7 Other Refinements -- 7.7.1 Stock Borrowing -- 7.7.2 Cross-Currency -- 7.7.3 Discrete Dividends -- 7.7.4 Transaction Costs -- 7.7.5 Rational Issuers -- 7.7.6 Pricing Dilution -- 7.8 Resets in Multinomial Models -- 7.8.1 Convertible Bond Pricing: Conclusions -- 8 Ascots -- 8.1 Risk Components of a Convertible -- 8.2 Asset Swaps -- 8.2.1 Introduction -- 8.2.2 Credit Risk -- 8.2.3 Closing Out the Swap -- 8.3 Ascots -- 8.3.1 Making the Asset Swap Callable -- 8.3.2 Convertible Asset Swap Package -- 8.3.3 Ascot Features -- 8.3.4 Ascot Term Sheet -- 8.4 Advantages for the Credit Buyer -- 8.5 Advantages for the Ascot Buyer -- 8.5.1 Credit -- 8.5.2 Leverage.

8.6 Pricing of Ascots -- 8.6.1 Intrinsic Model -- 8.6.2 Option Model -- 8.7 Ascot Greeks -- 8.7.1 Rho -- 8.7.2 Delta -- 8.8 CB Warrants -- PART III RISK MANAGEMENT AND STRATEGIES -- 9 Measuring the Risk -- 9.1 Portfolio Risk -- 9.2 A Portfolio in Trouble -- 9.3 Risk Categories -- 9.3.1 Market Risk -- 9.3.2 Liquidity Risk -- 9.3.3 Takeover Risk -- 9.3.4 Example: Nokian Tyres 0% 2014 -- 9.3.5 Example: Allergan Inc 1.5% 2026 -- 9.3.6 Documentation Risk -- 9.3.7 Model Risk -- 9.3.8 Counterparty Risk -- 9.3.9 Operational Risk -- 9.3.10 Regulation Risk -- 9.3.11 Financing Risk -- 9.4 Coherent Risk Measures -- 9.5 Option Greeks -- 9.5.1 Introduction -- 9.5.2 Extended Tree Method -- 9.5.3 Delta -- 9.5.4 Gamma -- 9.5.5 Rho -- 9.5.6 Omicron -- 9.5.7 Vega -- 9.5.8 Volga -- 9.5.9 Epsilon -- 9.5.10 Theta -- 9.6 Fixed Income Measures -- 9.6.1 Duration (Modified) -- 9.6.2 Yields -- 9.7 Cross Greeks -- 9.7.1 Charm -- 9.7.2 Vanna -- 9.8 Speed and Colour -- 9.9 VaR and Beyond -- 9.9.1 VaR Approaches -- 9.9.2 VaR-Related Measures -- 9.9.3 VaR Caveats -- 9.10 Back Testing -- 9.11 Stress Testing -- 10 Dynamic Hedging -- 10.1 Hedge Instruments -- 10.2 Delta Hedging -- 10.2.1 Introduction -- 10.2.2 More than Only Delta -- 10.2.3 Delta Hedge: Neutral, Over- or Under-hedge -- 10.2.4 Delta Caveats -- 10.2.5 Delta and Volatility -- 10.3 Volatility -- 10.3.1 Estimating Historical Volatility -- 10.3.2 Volatility Cone -- 10.3.3 Volatility Surface -- 10.3.4 Term Structure of σI -- 10.3.5 Volatility Smile of σI -- 10.3.6 Volsurface Movements -- 10.3.7 At-the-Money Volatility -- 10.4 Gamma Trading -- 10.4.1 Rebalancing the Delta Hedge -- 10.4.2 Dynamic Hedging with Transaction Costs -- 10.4.3 Hedging at What Volatility? -- 10.5 The Variance Swap -- 10.5.1 Introduction -- 10.5.2 Volatility Convexity -- 10.5.3 Spot and Forward Start -- 10.5.4 Mark to Market of the Variance Swap.

10.5.5 Caveats -- 11 Monte Carlo Techniques for Convertibles -- 11.1 Adding More Realism -- 11.1.1 Introduction -- 11.1.2 Deterministic Volatility -- 11.1.3 Multifactor Models -- 11.2 Monte Carlo Method -- 11.2.1 Introduction -- 11.2.2 Generating Random Paths -- 11.2.3 Errors -- 11.2.4 Variance Reduction -- 11.3 American Monte Carlo -- 11.3.1 Introduction -- 11.3.2 Longstaff and Schwartz Model -- 11.3.3 Example -- References -- Index.