The coverage of convertible bonds, where risk is driven by both fixed income and equity factors, highlights the power of BarraOne's multi-asset class risk model.
Key Features
BarraOne uses the Financial Engineering Associates, Inc. (FEA) one-factor convertible bond model in which the dynamics of the equity component are modeled and all other inputs are assumed to be deterministic:
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A trinomial tree is used for security valuation
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Backward substitution values a wide variety of embedded option features
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The model accounts for inefficient exercise
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Equity and fixed income components of the bond are valued using different discount rates; the equity component is discounted using the risk-free rate, whereas bond coupon and principal payments are discounted using the "risky rate" to account for the inherent credit risk
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Equity risk is measured using the equity factors within the Barra Integrated Model for the convertible bond's local market. Equity models are delivered for 59 equity markets - one for every market where there is a significant universe of convertible bonds
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Fixed income risk is measured using the local market Barra Fixed Income Model. Convertible exposure to credit and term structure factors is measured through complete revaluation.
Key Benefits
Model Flexibility - Model supports native or user supplied:
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Implied Volatility, Credit Spreads, Price
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Optional Price/Spread Calibration
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User provided CDS spread curves
Valuation Model - Supports several convertible features and security types:
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American, European, Bermudan
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LYONs, PRIDES, PERCS, DECS, Perpetual Preferred, Reverse Convertibles, Single Currency Soft Calls, Single Currency Refixes, Multi-Currency Conversion, Floating Convertibles, and Convertibles with step schedules
Platform Flexibility & Security Coverage - Broad coverage of instrument and asset types used in traditional convertible bond strategies: Equity, Equity Options, CDS, Corporate Bonds, etc.
Convertible Bond Analytics
Convertible Bond Valuation Analytics - Exposure Scalar (equity based delta), Break Even Period, Investment Value, Parity, Theoretical Premium, Conversation Ratio, Implied Volatility, Fitted Price
Traditional Greeks - Delta, Gamma, Vega, Theta & Rho
Risk Decomposition
Risk Measures
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Delta Adjusted equity industry/style factor exposures
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Effective duration, spread duration, convexity, etc.
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Issuer level default probabilities
Examples
Traditional Convertible Analytics
