CSC26 BV - Convertible Note Modelling

Session Description

Traditional convertible note models such as Tsveriotis-Fernandes model recognize that on the upside, where the note converts, the as-converted value should be modeled in a risk-neutral framework. This adjustment effectively values the bond component of the note using a risky discount rate on the downside and a risk-free rate on the upside, such that the overall value of the bond component as modeled in the convertible note model is higher than an equivalent straight debt with the same credit spread. To adjust for this inconsistency, it would be more appropriate to use a “downside spread” as the credit spread input into the convertible note model, such that the value of the bond component in the convertible note model matches the straight debt value using an appropriate credit spread given the credit risk of the instrument. In this presentation, we will demonstrate the impact of this issue using traded market data, especially for in-the-money notes. We will also discuss the impact on observed “volatility haircuts”.

Speakers

Amanda Miller | Managing Director | EY
Amit Saraswat | Director, Quantitative Finance &; Economics | EY-Parthenon

Continuing Education

Review of this session recording will award 1.2 CE hour(s). 

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