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Description of Global Convertible Investing

Praise for Global Convertible Investing: The Gabelli Way

"Hart has just written the best book on our product. Everyone will learn something from this Graham & Dodd for convertibles . . . a must–read for investors."
–Lorraine Lodge
Director, Convertible Research, ING Barings

"With the global convertible markets going from strength to strength, Global Convertible Investing is an excellent guide to this exciting asset class."
–Grant Mackie
Head of International Convertible Bond Research, Lehman Brothers

"Hart Woodson has written the most definitive work on convertibles to date. Not only does he provide a fully comprehensive study of the technical dynamics that are the essential ingredients of the convertible instrument, he discusses at length the myriad of other considerations that go into making an intelligent investment decision."
–Richard C. Nelson
Director, Convertible Research, ABN AMRO

"A pragmatic, plain–English and incredibly comprehensive tutorial of the convertible securities marketplace. A must–read for anyone considering issuing or investing in convertibles."
–Kendrick Wakeman
Director, Convertible Research, Wachovia Securities, Inc.

"Easily the most carefully constructed work on the world of convertible bonds. Hart combines the insights of a practitioner with the precision of an academic."
–John Wagner
Managing Partner, Camden Asset Management, LP

"This book is an essential guide to convertibles for new as well as existing convertible investors. It is comprehensive, and it reflects Hart′s extensive experience as a Global Convertible Portfolio Manager."
–Anand Iyer
Group Head, Convertible Research, Morgan Stanley

"All groups of investors will gain from this comprehensive and insightful book."
–James Peattie
Head of Equity Derivative Research, Dresdner Klienwort Wasserstein

"The book admirably combines a simple down–to–earth view of convertibles with technical and analytical rigor. Hart Woodson manages to discuss topics interesting to some but intimidating to many, such as convertible pricing models or convertible arbitrage strategies, in a way that makes it easily digestible and fun."
–Katalin Tischhauser
Head of International Convertible Research, Goldman Sachs

Title Information

ISBN:

9780471209829

Pages:

368 pages

Format:

Hardback

Product Code:

14719

Publisher:

John Wiley & Sons Ltd

Published:

14/01/2002

Edition:

1st Edition

Press and Industry Reviews

'Hart has just written the best book on our product. Everyone will learn something from this Graham & Dodd for convertibles . . . a must-read for investors.'
-Lorraine Lodge
Director, Convertible Research, ING Barings

'With the global convertible markets going from strength to strength, Global Convertible Investing is an excellent guide to this exciting asset class.'
-Grant Mackie
Head of International Convertible Bond Research, Lehman Brothers

'Hart Woodson has written the most definitive work on convertibles to date. Not only does he provide a fully comprehensive study of the technical dynamics that are the essential ingredients of the convertible instrument, he discusses at length the myriad of other considerations that go into making an intelligent investment decision.'
-Richard C. Nelson
Director, Convertible Research, ABN AMRO

'A pragmatic, plain-English and incredibly comprehensive tutorial of the convertible securities marketplace. A must-read for anyone considering issuing or investing in convertibles.'
-Kendrick Wakeman
Director, Convertible Research, Wachovia Securities, Inc.

'Easily the most carefully constructed work on the world of convertible bonds. Hart combines the insights of a practitioner with the precision of an academic.'
-John Wagner
Managing Partner, Camden Asset Management, LP

'This book is an essential guide to convertibles for new as well as existing convertible investors. It is comprehensive, and it reflects Hart's extensive experience as a Global Convertible Portfolio Manager.'
-Anand Iyer
Group Head, Convertible Research, Morgan Stanley

'All groups of investors will gain from this comprehensive and insightful book.'
-James Peattie
Head of Equity Derivative Research, Dresdner Klienwort Wasserstein

'The book admirably combines a simple down-to-earth view of convertibles with technical and analytical rigor. Hart Woodson manages to discuss topics interesting to some but intimidating to many, such as convertible pricing models or convertible arbitrage strategies, in a way that makes it easily digestible and fun.'
-Katalin Tischhauser
Head of International Convertible Research, Goldman Sachs

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About Hart Woodson

HART WOODSON is the Managing Director of Gabelli Asset Management (UK) Ltd. He joined Gabelli (New York) in 1993 as a Senior Vice President and Portfolio Manager. Before joining Gabelli, he worked in Amsterdam, the Netherlands, for ABN AMRO Bank where he was responsible for new issue activities concerning convertible bonds, preferred shares, and warrants in all currencies. Prior to that he worked in New York for AMRO Bank in the Capital Markets Group and as a Credit Analyst for Meridien International Bank. Mr. Woodson graduated from Trinity College, Hartford, with honors in history and international relations. He received his master′s degree in international affairs from Columbia University, New York, where he was elected an International Fellow.

Contents of Global Convertible Investing

PART ONE: THE CONVERTIBLE BASICS

1. Anatomy of a Convertible
What Is a Convertible?
Why Should an Investor Consider Convertibles?
Why Should a Company Issue a Convertible?
Nomenclature
Investment Value
Convertible Performance.

2. Convertible Structures: Let Me Count the Ways
Zero-Coupon Convertible Bonds (OID)
Puttable Convertible Bonds
Coupon Paying Convertible Bonds
Convertible Preferred Stock
Mandatory Convertible Securities (MCS)
Other Features
Other Convertible Structures

3. Understanding the Prospectus: Caveat Emptor
Call Protection
Dilution Protection (Extraordinary Dividends)
Ranking Shares
Sleeping Investor Clauses
Convertibility
Ranking: Senior or Subordinated
Takeover Protection
Redemption Terms (Cash or Stock)
Conditional Income
Conclusion

4. Global Convertible Markets
Size
Credit Quality
Sector Allocation
Characteristics
Recent Trends

5. Benchmarks and Performance: Global and Domestic Indices
Benchmarks
Convertible Indices
Domestic Convertible Indices
Global Convertible Indices
Convertibles as an Asset Class
Additional Notes

6. Convertible Valuation: A Cultural Overview
Japan: Convertibles as an Equity Alternative
United Kingdom: The Dividend Cross-Over Method
Netherlands: The Total Premium Method
Option Pricing Models


PART TWO: CONVERTIBLE PRICING AND VALUATION

7. Option Pricing Theory
Introduction
Establishing the Boundary Conditions of a Call Option
How to Price a Call Option: A Leveraged Position in the Stock
No Arbitrage Opportunity
How to Price a Call Option: Discounted Expected Return
Deriving a General Formula to Price a Call Option
The BlackScholes Option Pricing Formula
Adjusting for Stocks Paying a Known Dividend Yield

8. Using the BlackScholes Model to Price a Convertible Bond
Bond plus a Call Warrant
Warrant versus Option: Dilution
Cash Pay versus Exchange
The Investment Value
Adjustments to Investment Value: Maturity Date and Accrued Interest
The Warrant Value

9. Sensitivity Analysis: The Greeks
Changing Share Price: Delta
Rate of Change of Delta: Gamma
Where Is Gamma Maximized?
Changes in Volatility: Vega
What Is Volatility?
Changes in Interest Rates: Rho and Duration
The Bond Effect: Duration
The Warrant Effect: Rho
The Passage of Time: Theta
How Much Time Do I Have Left?


10. Convertible Bond Pricing: Binomial Trees
Introduction
Building the Stock Tree
Building the Bond Tree
Combining the Trees to Price the Convertible Bond
Which Discount Rate to Use?
Modifications to the Binomial Tree
Dividends
Adjusting for Call Options
Adjusting for Put Options
Adjusting the Model for Credit Risk

11. Convertible Bond Pricing: Put plus Stock plus Yield Advantage
The Equity Portion
The Put Option
The Yield Advantage


PART THREE: CONVERTIBLE HEDGING

12. Convertible Arbitrage
Is a Pure Arbitrage Possible?
Why Hedge?
What to Hedge?
Who Hedges?
The Ideal Hedge Candidate
Volatility Unmasked
Calculating Historic Volatility
Convertible Hedging Strategies
Creating the Short Position
The Individual Investor
The Institutional Investor
The Nonresident Investor
Executing a Short Sale
The Neutral Hedge: No Leverage
How Much to Hedge?
Leveraging the Position under Regulation T (50% Leverage)
Maximizing Leverage
The Cost of Carry
The Cost of Margin Debt
The Short Rebate
Neutral Hedge with Maximum Leverage
Bull Hedge with Maximum Leverage
Bear Hedge with Maximum Leverage
When to Adjust the Hedge?
How to Adjust the Hedge?
When to Close Out the Hedge?
What Can Go Wrong with the Hedge?
Additional Notes: Deep In-the-Money Hedging Strategy

13. Hedging with Options
Introduction
Hedging Convertibles with Put Options: Full Hedge
Hedging Convertibles with Put Options: Partial Hedge
Hedging Convertibles with Call Options: Full Hedge
Hedging Convertibles with Call Options: Partial Hedge
Hedging Convertibles with Puts and Calls: Neutral Hedge

14. Hedging Interest Rate and Default Risk
Hedging Interest Rate Risk
The Cash Hedge: Shorting Treasuries
The Futures Hedge
The U.S. Treasury Bond Futures Contract
Calculating the U.S. Treasury Bond Cash Futures Price
Quoted Futures Price
Constructing the Futures Hedge
The Option Hedge
Hedging Default Risk
The Asset Swap Market
The Mechanics: Initiating the Asset Swap
Callable Asset Swap: Cash Flows
Calling the Swap
Callable Asset Swaps: Benefits and Drawbacks
Credit Default Swaps

15. Hedging Currency Risk
The Foreign Exchange Market
Quotation Conventions
Cross Currency Rates
Spot and Forward Markets
Forward Exchange Rates
Money Machine?
Fishers Theorem
Forward Points: Discount or Premium?
Hedging Currency Risk
Case I: Foreign Currency Convertible with Foreign Currency Stock
Case II: Local Currency Convertible with Foreign Currency Stock
Case III: Foreign Currency Convertible with Local Currency Stock
Case IV: Foreign Currency Convertible with a Different Foreign Currency Stock


PART FOUR: SPECIAL TOPICS

16. Mandatory Convertible Securities
Introduction
Valuing the MCS: Giving Up Downside Protection for Yield
Valuing the MCS: From Buy Write to Call Spread
The Mysterious Changing Conversion Ratio
Performance Based Conversion Premium
An MCS Example
Definitions of Terms
Sensitivity Analysis
Price Effects of Hedging the MCS
False Illusions in Valuing the MCS
MCS Product Evolution
Primary Distribution
Swapping the Fixed-Income Component: Corporate versus Treasury MCS
Other Mechanics of the Swap
Secondary Distribution
Accounting Treatment
Sealed Air Corporation
EPS Dilution: Tax-Deductible MCS (Treasury Stock Method)
Treasury Stock Method: Income Statement and Balance Sheet Implications
MCS: U.S. Tax Treatment
Conclusion

17. Busted Convertibles: Market Overview
What Is a Busted Convertible?
When Is a Convertible Busted?
Market Overview
Busted Convertibles by Sector
Busted Convertibles by Product Type
Busted Convertibles by Credit Quality Rating
Default Rates: Convertibles versus Junk Bonds

18. Investing in Busted Convertibles
Advantages of Busted Convertibles
Disadvantages of Busted Convertibles
Old Economy Case Study: Mark IV Industries
The Investment Opportunity
Credit Analysis 101
Leverage Ratios
Liquidity Ratios
Coverage Ratios
Efficiency Ratios
Working Capital Management
Profitability Ratios
The Altman Z-Score Model: Predicting Bankruptcy
Interpretation of the Altman Z-Score
Conclusion (Mark IV)
New Economy Credit Analysis: Global TeleSystems
Investment Opportunity
Credit Analysis
Conclusion (Global TeleSystems)

19. The Investment Decision
Why Convertibles?
Convertibles: Better than a Balanced Portfolio?
The Convexity Ratio
Convertibles: The Investment Decision
Equity Analysis 101: Growth Stocks
The Equity Risk Premium
The Terminal Multiple
Equities 101: Value Stocks
Intrinsic Value
Private Market Value (PMV)
Equity Analysis 101: Discounted Cash Flow Analysis (DCF)
Convertibles: The Technical Investment Decision
Building a Diversified Convertible Portfolio
Sell Discipline


EPILOGUE
APPENDIX 1: MCS NAME VARIATIONS
APPENDIX 2: USEFUL INTERNET SITES
GLOSSARY OF NOTATION
GLOSSARY OF TERMS
BIBLIOGRAPHY
INDEX