Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • January 2008
  • Background Note
  • HBS Case Collection

Convertible Arbitrage

By: Joshua Coval and Erik Stafford
  • Format:Print
  • | Pages:5
ShareBar

Abstract

The goal of this simulation is to understand how convertible bonds can be viewed as a portfolio of simpler securities and to introduce an over-the-counter market. The convertible bonds that are available during the simulation are at-the-money and in-the-money so that changing credit risk exposure is not much of an issue. A convertible bond can be viewed as a simple coupon paying corporate bond plus a conversion option. A bond pricing model discounts the promised payments at a rate that compensates for time, risk, and expected loss (maturity matched Treasury yield plus a credit rating matched yield spread). The conversion option can be valued using the Black-Scholes call option pricing formula. The key is to recognize that each conversion option (one per bond) is equivalent to several equity call options (the conversion ratio determines how many equity options are implicit in each bond).

Keywords

Bonds; Investment Portfolio; Price; Risk Management; Mathematical Methods

Citation

Coval, Joshua, and Erik Stafford. "Convertible Arbitrage." Harvard Business School Background Note 208-116, January 2008.
  • Educators
  • Purchase

About The Authors

Joshua D. Coval

Finance
→More Publications

Erik Stafford

Finance
→More Publications

More from the Authors

    • February 2023
    • Faculty Research

    Success Academy Charter Schools

    By: Robin Greenwood, Joshua D. Coval, Denise Han, Ruth Page and Dave Habeeb
    • February 2023
    • Faculty Research

    Success Academy Charter Schools

    By: Robin Greenwood, Joshua Coval and Denise Han
    • December 2022
    • Faculty Research

    Managing Pain in the Midst of an Opioid Epidemic

    By: Joshua D. Coval, Richard S. Ruback and Christopher Diak
More from the Authors
  • Success Academy Charter Schools By: Robin Greenwood, Joshua D. Coval, Denise Han, Ruth Page and Dave Habeeb
  • Success Academy Charter Schools By: Robin Greenwood, Joshua Coval and Denise Han
  • Managing Pain in the Midst of an Opioid Epidemic By: Joshua D. Coval, Richard S. Ruback and Christopher Diak
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College