Hybrid financial securities contain properties of both debt and equity. Blending the properties of two easy-to-understand asset classes such as equity and bonds into a hybrid does not leave us an instrument with straightforward properties and therefore hybrids are often misunderstood and miss-sold. The high yields offered by these securities attract investors, this yield is a compensation for the particular complex anatomy of these instruments. This complexity results from the introduction of several coupon deferral mechanisms and issuer calls with or without set-up features. The newest member…mehr
Hybrid financial securities contain properties of both debt and equity. Blending the properties of two easy-to-understand asset classes such as equity and bonds into a hybrid does not leave us an instrument with straightforward properties and therefore hybrids are often misunderstood and miss-sold. The high yields offered by these securities attract investors, this yield is a compensation for the particular complex anatomy of these instruments. This complexity results from the introduction of several coupon deferral mechanisms and issuer calls with or without set-up features. The newest member in this asset class is a CoCo bond, where the investor is possibly exposed to a particular loss absorption mechanism. Through practical examples and case studies, The Handbook of Hybrid Securities: Convertible Bonds, CoCo Bonds and Bail-in guides the reader through the different structures and their particular risks. Starting with an introduction to convertible bonds, the book covers bail-in capital and contingent convertibles (CoCo Bonds). Basel III, the new regulatory framework that has been driving these new developments is discussed as well. The price dynamics and valuation of CoCo bonds are presented in a practical way, using a Black Scholes approach, a Constant Elasticity of Variance (CEV) framework, American Monte Carlo techniques, to name a few. The Handbook of Hybrid Securities offers a quantitative and practical approach for readers at all levels of experience. The book is ideal for the absolute beginner wishing to familiarise themselves with this asset class and its regulatory context. For more advanced users, working in areas such as trading, portfolio and risk management, the book provides a detailed introduction to the latest advances in numerical techniques in order to value and hedge these instruments.
Jan De Spiegeleer (Geneva, Switzerland) is head of risk management at Jabre Capital Partners, a Geneva-based hedge fund. He earned an extensive knowledge of derivatives pricing, hedging and trading while working for KBC Financial Products in London, where he was managing director of the equity derivatives desk. He also ran his own market neutral statistical arbitrage hedge fund (EQM Europe) after founding Erasmus capital in 2004. Prior to this financial career, Jan served ten years in the Belgian Army as an Officer. With Wim Schoutens he co-authored the Handbook of Convertible Bonds published by Wiley. Cynthia Van Hulle (Leuven, Belgium) is a full professor of Finance at the Department of Accounting, Finance and Insurance of the Faculty of Economics and Business at the Catholic University of Leuven. Over the last 20 years she has acquired extensive practical experience through her board memberships in the financial sector and organization of in-company training programs. She has published considerably in scientific journals a.o. Journal of Banking and Finance, Journal of Finance, Journal of Corporate Finance, European Financial Management, Journal of Business Research, Journal of Business, Finance and Accounting, Small Business Economics. She also held the Francqui-chair and is co-author of several books in corporate finance. Wim Schoutens (Leuven, Belgium) is a research professor in financial engineering at the Department of Mathematics at the Catholic University of Leuven, Belgium. He has extensive practical experience of model implementation and is well known for his consulting work to the banking industry and other institutions. In particular, he is an independent expert advisor to the European Commission (DG-COMP) on impaired assets and asset relief measures and has assessed in that position more than EUR 1 trillion of assets; in particular he was one of the main expert advisors for the stress test on the Spanish banks and the related bailouts. Wim is also the author of several books including Contingent Convertibles (CoCos): Structure and Pricing, the first book ever on Contingent Capital and CoCo bonds (written together with Jan De Spiegeleer). He is Managing Editor of the International Journal of Theoretical and Applied Finance and Associate Editor of Mathematical Finance, Quantitative Finance and Review of Derivatives Research. Finally, he is member of the Belgium CPI commission and independent director of the Board of Assénagon Asset Management S.A.
Inhaltsangabe
1 Hybrid Assets 1
1.1 Introduction 1
1.2 Hybrid Capital 1
1.3 Preferreds 4
1.4 Convertible Bonds 7
1.5 Contingent Convertibles 9
1.6 Other Types of Hybrid Debt 10
1.7 Regulation 20
1.8 Bail-In Capital 22
1.9 Risk and Rating 24
1.10 Conclusion 25
2 Convertible Bonds 27
2.1 Introduction 27
2.2 Anatomy of a Convertible Bond 30
2.3 Convertible Bond Arbitrage 51
2.4 Standard Features 65
2.5 Additional Features 82
2.6 Other Convertible Bond Types 88
2.7 Convertible Bond Terminology 95
2.8 Convertible Bond Market 102
2.9 Conclusion 106
3 Contingent Convertibles (CoCos) 107
3.1 Introduction 107
3.2 Definition 109
3.3 Anatomy 110
3.4 CoCos and Convertible Bonds 121
3.5 CoCos and Regulations 125
3.6 Ranking in the Balance Sheet 150
3.7 Alternative Structures 151
3.8 Contingent Capital : Pro and Contra 152
4 Corporate Hybrids 159
4.1 Introduction 159
4.2 Issuer of Hybrid Debt 160
4.3 Investing in Hybrid Debt 160
4.4 Structure of a Corporate Hybrid Bond 161
4.5 View of Rating Agencies 170
4.6 Risk in Hybrid Bonds 170
4.7 Convexity In Hybrid Bonds 173
4.8 Equity Character of Hybrid Bonds 177
5 Bail-in Bonds 181
5.1 Introduction 181
5.2 Definition 183
5.3 Resolution Regime 184
5.4 Case Studies 191
5.5 Consequences of Bail-in 195
5.6 Conclusion 197
6 Modeling Hybrids : An Introduction 199
6.1 Introduction 199
6.2 Heuristic Approaches 200
6.3 Building Models 205
6.4 How many factors ? 213
6.5 Sensitivity Analysis 217
7 Modeling Hybrids: Stochastic Processes 225
7.1 Introduction 225
7.2 Probability Density Functions 226
7.3 Brownian Motion 232
7.4 Ito Process 233
7.5 Poisson Process 243
8 Modeling Hybrids : Risk Neutrality 251
8.1 Introduction 251
8.2 Closed Form Solution 255
8.3 Tree-based methods 264
8.4 Finite Diverence Technique 289
8.5 Monte Carlo 290
9 Modeling Hybrids: Advanced Issues 299
9.1 Tail Risk in Hybrids 299
9.2 Jump-Divusion 301
9.3 Correlation 323
9.4 Structural Models 337
9.5 Conclusion 340
10 Modeling Hybrids : Handling Credit 343
10.1 Credit Spread 343
10.2 Default Intensity 348
10.3 Credit Default Swaps 350
10.4 Credit Triangle 365
10.5 Stochastic Credit 370
11 Constant Elasticity of Variance (CEV) 373
11.1 From Black-Scholes to CEV 373
11.2 Historical Parameter Estimation 378
11.3 Valuation : Analytical Solution 383
11.4 Valuation : Trinomial Trees for CEV 386
11.5 Jump-Extended CEV Process 394
11.6 Case Study : Pricing Mandatories with CEV 398
11.7 Case Study : Pricing Convertibles with a Reset 400
11.8 Calibration of CEV 410
12 Pricing Contingent Debt 417
12.1 Introduction 417
12.2 Credit Derivatives Method 418
12.3 Equity Derivatives Method 425
12.4 Coupon Deferral 439
12.5 Using Lattice Models 445
12.6 Linking Credit to Equity 447
12.7 CoCos with Upside : CoCoCo 455
12.8 Adding Stochastic Credit 460
12.9 Avoiding Death Spirals 467
12.10Appendix : Pricing Contingent Debt on a Trinomial Tree 470
