Monday, 26 September 2011

Anatomy of a convert - introduction

I thought I'd try to understand how securities get priced by taking one of the most tricky of the asset classes, the convertible bond, and breaking it down into its constituent valuation parts, slowly building up my understanding to a stage where it is possible to price a real convertible bond.

This will take time, and along the way, I'll post on rates, yield curves, corporate bonds, equities, options, warrants, exotic contractual clauses, all of which will need to come together to get the fair price of a convertible bond.  This will be a long term project but is a well-targeted way of exploring some of the main  points of quantitative finance without it becoming a general introduction on quantitative finance.  Also textbooks, virtually without exception, are written in too dry a manner.  I'd like this exploration of the elements which go into the pricing of a convertible bond to be fun, slowly paced, and capable of taking the time to flesh out any side-track subjects which happen to take my fancy along the way.  If I can't write clearly about it then that's a clear sign I don't understand it enough myself yet.

I'll include Anatomy of a convert somewhere in the post title each time I make a contribution to this thread, so it should be, in time, easy to pull all these postings together, though if the posting seems like it could be useful as a stand-alone article, then I'll give it its own title, then link to it from some other Anatomy of a convert posting, so that they could still all be pulled together.

I shall be pitching it at a mathematically literate reader, though not one who knows a lot up front about finance.  I don't want each posting to be too onerous so I'll try to make them short.