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Convertible bonds and discrete dividends
Hi,For a CB convertible into dividend paying stock, would you expect the CB value to change (all things being equal) immediately after stock ex-div date? I don't think so.Are CBs conventionally quoted based on real discrete dividends or on a dividend yield? If the latter, then a delta hedged portfolio of long CB and short stock would show a saw-tooth P&L evolution as the CB price would creep up as the dividend accrues and then jump down on ex-div date as the referenced stock price jumps down.Any comments appreciated.Rgds,Jon
Convertible bonds and discrete dividends
CB price stays constant across the discrete dividend payment in order to maintain no-arbitrage condition
Convertible bonds and discrete dividends
Last edited by anupkurup on June 28th, 2010, 10:00 pm, edited 1 time in total.
Convertible bonds and discrete dividends
Its analogous to the way option prices are continuous across discrete dividends. The holder of the stock receives a payout so it makes sense for the stock price to drop immediately afterwards. However the option holder does not receive any cash flow so there should not be a jump in option price. If there were to be a known jump up/down in option price on a particular day, the market would buy/sell accordingly until the jump was smoothed out.
Convertible bonds and discrete dividends
in any case, i don't think there is a market convention on quoting CBs according to dividend yield. I'm even curious as to know if there is any such convention for vanilla otc options...