Quantifi, a provider of risk, analytics and trading solutions has published a whitepaper titled ‘What Drives the Convertible Bond Market?’. The whitepaper explores the key drivers that influence the convertible bond market and how it provide unique opportunities for both investors and issuers.
The global convertible bond market, which languished in the doldrums since the great financial crisis of 2008/2009, has staged something of a comeback over the past 18 months or so. This whitepaper provides an overview of the exigencies of this instrument, the reasons for its resurgence and whether the trend will continue in light of the current inflationary environment.
“The basic structure of convertibles might not seem to be overwhelmingly difficult to value. The credit component is valued through the credit default swap market, while equity optionality is valued in part through the traditional Black–Scholes option model. However, in reality, convertibles are difficult to value in part due to the myriad of additional features they contain. The underlying characteristics of this security make for interesting and complex pricing and valuation dynamics,” comments Dmitry Pugachevsky, Director of Research, Quantifi.
Convertible bonds make a lot of sense for a certain class of borrowers and many investors, which is why it has been around for so long. However, the market tanked after the financial crisis and issuance dwindled to a trickle. There were several reasons for this. Firstly, of course, equity values tumbled and investors lost faith in the instrument. Both demand and supply dried up. As the economy bounced back surprisingly strongly in the second half of 2020, the convertible market was again popular with a new set of borrowers.
“Convertibles are particularly difficult to value because they contain a number of advanced call and put features. To make informed decisions and take advantage of investment opportunities requires sophisticated pricing and risk analytics. In today’s fast-paced environment, firms that realise maximum benefit are those with access to powerful modelling, analytical and pricing capabilities – as used by technology providers such as Quantifi,” comments Avadhut Naik, Head of Solutions, Quantifi.