About borrowing cost of convertible bond

dodobaby · June 24th, 2004, 9:23 am

Hi! I have questions about the borrowing coast of CBs. Cause everyone's borrowing cost is somewhat different, how do I decide the delta and gamma of CBs when my borrowing cost is bigger than others? Would have any questions when trading vol? Thx a lot!

daveangel · June 24th, 2004, 11:19 am

You mean the borrow cost of the stock, right ? Or are you thinking of shorting the CB ?Of course, everyone will have a different forward. Your delta and gamma will be different to your competitors.

Graeme · June 25th, 2004, 4:53 pm

there is a thread about this already on this forum, I think "short rebate in convertible bonds" or something like that. Essentially, you can prove (it isn't so easy, and it is true for all models, not just cbs) that you can plug in the cost of borrowing stock as a dividend yield into your model and.or de. As in Black-Scholes for example, this affects all your greeks, in the cb model, probably via the fd scheme that implements the de.

dodobaby · June 28th, 2004, 8:36 am

Yes,I mean the borrowing cost of stock. And when I do delta hedge, how does the borroing cost influence greeks? And how to hedge practically is reasonable?