convertible bond ( stress testing)

PhDStudent · August 19th, 2013, 9:24 pm

I am trying to stress some Cbs using the implied volatility during the Lehman collapse. My model is still giving me some huge profits.Please need some help

Tad · August 20th, 2013, 7:03 am

this is way too much information for anyone to help

daveangel · August 20th, 2013, 7:26 am

that is because you have not adjusted your credit spreads .... CBs traded down through "bond floors" like there was no tomorrow.

pimpel · August 22nd, 2013, 9:39 am

How do you value your bonds? If you use something like Ayache Forsyth Vetzal approach, then you would have relation between stock and credit spread. High volatility then increases the chance of hitting low stock values.

someonesomewhere · August 27th, 2013, 6:19 am

Unable to delete this empty post. Apologies

PhDStudent · August 29th, 2013, 4:47 pm

How to adjusted it please??????????

daveangel · August 29th, 2013, 6:16 pm

what model are you using ?

PhDStudent · August 30th, 2013, 7:13 am

Binomial model with functional spread

daveangel · August 30th, 2013, 7:41 am

wind the spreads out (have a look at where some well known indices were trading during the crisis). Factor in high borrow costs for your shorts. See where it comes out.

PhDStudent · September 3rd, 2013, 4:54 pm

What is the optimal recovery rate to use

daveangel · September 3rd, 2013, 6:49 pm

i dont think there is one. look up what recovery rates have been for seniority and credit quality. Professor Altman compiles this data somewhere

PhDStudent · September 9th, 2013, 9:24 am

what about the implied vol?

daveangel · September 9th, 2013, 9:51 am

QuoteOriginally posted by: PhDStudentwhat about the implied vol?sure - vol went through the roof ... but it matters little when all your call options are out of the money. Its the implied vol on the put options that you are short (as a holder of cb) that matters when the stock collapses. and that is captured by the CDS spread blow out.

PhDStudent · September 9th, 2013, 12:31 pm

ths, but assume I am the holder of the CBs, how to simulate the impl. vol

daveangel · September 9th, 2013, 12:37 pm

that was from the perspective of the CB holder. if you hold a cb you are short the put on the firm's assets. like any bond holder. You could look at the VIX index if you need to see where vols were. or look at implied vols from traded options on the stocks