BV534 Investigating Volatility Haircuts/Caps in Convertible Bonds Valuation

Webinar Description

It is commonly seen in practice that a volatility “haircut” or “cap” – reducing the volatility if the market data suggests an elevated volatility level – is applied to appropriately price the convertible bonds, under the assumption that the convertible markets do not typically price in the full volatility at elevated levels. In this study, a set of traded convertible bonds with observable yields were selected and valued, and the model values were compared against observable traded values. Volatility caps were subsequently introduced and differences in model vs market prices were investigated. We find evidence to support the notion that market prices for convertibles do not always reflect the observed levels of volatility, and that using the observed volatility without an adjustment may result in overvaluing the convertible instruments in some cases.

Learning Outcomes

Upon webinar completion, the participant will be able to:

• Analyze the volatility input for convertible notes; 
• Identify situations where a cap on a volatility may be appropriate;
• Apply appropriate caps and/or haircuts to the volatility input; and
• Discuss nuances of volatility estimation for convertible bonds with low vs high credit quality.

Course Audience

Valuation practitioners in complex securities valuation

Instructor Information

Amir Alerasoul | VRC

Amir Alerasoul is a Managing Director at VRC’s Complex Instruments Group. Mr. Alerasoul specializes in the valuation of stock compensation, options, derivatives and complex securities. Prior to joining VRC, Mr. Alerasoul held the position of valuation manager at Deloitte Transactions and Business Analytics where he valued complex debt and equity positions. He also held positions at Morgan Stanley and Deutsche Bank where he valued different equity products including exotic equity derivatives. He earned an MBA with concentrations in finance and quantitative analysis from Carnegie Mellon University and a masters in financial engineering from Baruch University.

Marina Kagan | PwC

Marina Kagan is a Partner in the San Francisco office of PwC and works in the firm's Financial Analytics and Derivatives practice. Marina has 14+ years of experience implementing complex financial models for a variety of asset classes and transactions, including fixed income, commodity, and equity derivatives, contingent assets/liabilities, intellectual property, and corporate transactions, for accounting, tax, and management decision making purposes. Marina has extensive experience with statistical modeling, data and analytics, assisting clients with assessing risks and quantifying uncertainties in transactions and complex financial decisions through simulation models, decision analysis, and data visualization. Prior to joining PwC in 2008, Marina was an Associate Director at Fitch Ratings. Marina has an MS in Mathematics in Finance from New York University, and a BS in Computational Mathematics from the City University of New York. 

Continuing Education

Review of this session recording will award 2 CE hour(s). 

CPE credit is not awarded for this pre-recorded offering.