O'Reilly logo

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

The Handbook of Hybrid Securities: Convertible Bonds, CoCo Bonds and Bail-In

Book Description

Introducing a revolutionary new quantitative approach to hybrid securities valuation and risk management

To an equity trader they are shares. For the trader at the fixed income desk, they are bonds (after all, they pay coupons, so what's the problem?). They are hybrid securities. Neither equity nor debt, they possess characteristics of both, and carry unique risks that cannot be ignored, but are often woefully misunderstood. The first and only book of its kind, The Handbook of Hybrid Securities dispels the many myths and misconceptions about hybrid securities and arms you with a quantitative, practical approach to dealing with them from a valuation and risk management point of view.

  • Describes a unique, quantitative approach to hybrid valuation and risk management that uses new structural and multi-factor models

  • Provides strategies for the full range of hybrid asset classes, including convertible bonds, preferreds, trust preferreds, contingent convertibles, bonds labeled "additional Tier 1," and more

  • Offers an expert review of current regulatory climate regarding hybrids, globally, and explores likely political developments and their potential impact on the hybrid market

  • The most up-to-date, in-depth book on the subject, this is a valuable working resource for traders, analysts and risk managers, and a indispensable reference for regulators

  • Table of Contents

    1. Reading this Book
    2. Acknowledgments
    3. 1 Hybrid Assets
      1. 1.1 Introduction
      2. 1.2 Hybrid Capital
      3. 1.3 Preferreds
      4. 1.4 Convertible Bonds
      5. 1.5 Contingent Convertibles
      6. 1.6 Other Types of Hybrid Debt
      7. 1.7 Regulation
      8. 1.8 Bail-In Capital
      9. 1.9 Risk and Rating
      10. 1.10 Conclusion
    4. 2 Convertible Bonds
      1. 2.1 Introduction
      2. 2.2 Anatomy of a Convertible Bond
      3. 2.3 Convertible Bond Arbitrage
      4. 2.4 Standard Features
      5. 2.5 Additional Features
      6. 2.6 Other Convertible Bond Types
      7. 2.7 Convertible Bond Terminology
      8. 2.8 Convertible Bond Market
      9. 2.9 Conclusion
    5. 3 Contingent Convertibles (CoCos)
      1. 3.1 Introduction
      2. 3.2 Definition
      3. 3.3 Anatomy
      4. 3.4 CoCos and Convertible Bonds
      5. 3.5 CoCos and Regulations
      6. 3.6 Ranking in the Balance Sheet
      7. 3.7 Alternative Structures
      8. 3.8 Contingent Capital: Pro and Contra
    6. 4 Corporate Hybrids
      1. 4.1 Introduction
      2. 4.2 Issuer of Hybrid Debt
      3. 4.3 Investing in Hybrid Debt
      4. 4.4 Structure of a Corporate Hybrid Bond
      5. 4.5 View of Rating Agencies
      6. 4.6 Risk in Hybrid Bonds
      7. 4.7 Convexity in Hybrid Bonds
      8. 4.8 Equity Character of Hybrid Bonds
    7. 5 Bail-In Bonds
      1. 5.1 Introduction
      2. 5.2 Definition
      3. 5.3 Resolution Regime
      4. 5.4 Case Studies
      5. 5.5 Consequences of Bail-In
      6. 5.6 Conclusion
    8. 6 Modeling Hybrids: An Introduction
      1. 6.1 Introduction
      2. 6.2 Heuristic Approaches
      3. 6.3 Building Models
      4. 6.4 How Many Factors?
      5. 6.5 Sensitivity Analysis
    9. 7 Modeling Hybrids: Stochastic Processes
      1. 7.1 Introduction
      2. 7.2 Probability Density Functions
      3. 7.3 Brownian Motion
      4. 7.4 Ito Process
      5. 7.5 Poisson Process
    10. 8 Modeling Hybrids: Risk Neutrality
      1. 8.1 Introduction
      2. 8.2 Closed-Form Solution
      3. 8.3 Tree-Based Methods
      4. 8.4 Finite Difference Technique
      5. 8.5 Monte Carlo
    11. 9 Modeling Hybrids: Advanced Issues
      1. 9.1 Tail Risk in Hybrids
      2. 9.2 Jump Diffusion
      3. 9.3 Correlation
      4. 9.4 Structural Models
      5. 9.5 Conclusion
    12. 10 Modeling Hybrids: Handling Credit
      1. 10.1 Credit Spread
      2. 10.2 Default Intensity
      3. 10.3 Credit Default Swaps
      4. 10.4 Credit Triangle
      5. 10.5 Stochastic Credit
    13. 11 Constant Elasticity of Variance
      1. 11.1 From BlackÔÇôScholes to CEV
      2. 11.2 Historical Parameter Estimation
      3. 11.3 Valuation: Analytical Solution
      4. 11.4 Valuation: Trinomial Trees for CEV
      5. 11.5 Jump-Extended CEV Process
      6. 11.6 Case Study: Pricing Mandatories With CEV
      7. 11.7 Case Study: Pricing Convertibles with a Reset
      8. 11.8 Calibration of CEV
    14. 12 Pricing Contingent Debt
      1. 12.1 Introduction
      2. 12.2 Credit Derivatives Method
      3. 12.3 Equity Derivatives Method
      4. 12.4 Coupon Deferral
      5. 12.5 Using Lattice Models
      6. 12.6 Linking Credit to Equity
      7. 12.7 CoCos with Upside: CoCoCo
      8. 12.8 Adding Stochastic Credit
      9. 12.9 Avoiding Death Spirals
      10. 12.10 Appendix: Pricing Contingent Debt on a Trinomial Tree
    15. 13 Multi-Factor Models for Hybrids
      1. 13.1 Introduction
      2. 13.2 Early Exercise
      3. 13.3 American Monte Carlo
      4. 13.4 Multi-Factor Models
      5. 13.5 Conclusion
    16. References
    17. Index