Convertible Arbitrage: Insights and Techniques for Successful Hedging [Hardcover]

Nick P. Calamos (Author)

Book Description

Series: Wiley Finance | Publication Date: June 13, 2003

Minimize risk and maximize profits with convertible arbitrage
Convertible arbitrage involves purchasing a portfolio of convertible securities-generally convertible bonds-and hedging a portion of the equity risk by selling short the underlying common stock. This increasingly popular strategy, which is especially useful during times of market volatility, allows individuals to increase their returns while decreasing their risks. Convertible Arbitrage offers a thorough explanation of this unique investment strategy. Filled with in-depth insights from an expert in the field, this comprehensive guide explores a wide range of convertible topics. Readers will be introduced to a variety of models for convertible analysis, "the Greeks," as well as the full range of hedges, including titled and leveraged hedges, as well as swaps, nontraditional hedges, and option hedging. They will also gain a firm understanding of alternative convertible structures, the use of foreign convertibles in hedging, risk management at the portfolio level, and trading and hedging risks. Convertible Arbitrage eliminates any confusion by clearly differentiating convertible arbitrage strategy from other hedging techniques such as long-short equity, merger and acquisition arbitrage, and fixed-income arbitrage.
Nick Calamos (Naperville, IL) oversees research and portfolio management for Calamos Asset Management, Inc. Since 1983 his experience has centered on convertible securities investment. He received his undergraduate degree in economics from Southern Illinois University and an MS in finance from Northern Illinois University.

Editorial Reviews

Review

"...filled with in-depth insights and a wide range of convertible topics, provides a thorough explanation..." (Financial World, January 2004)

From the Inside Flap

Investment professionals familiar with convertible arbitrage techniques recognize the strategy as a rock-solid tool for generating significant returns regardless of market movements. It’s no surprise, then, that amidst the backdrop of market volatility and investor uncertainty, the field of convertible arbitrage keeps growing. Since 1993, the convertible arbitrage market has grown at an astounding 45% compound annual growth rate through the first half of 2002 to $24 billion.*

In Convertible Arbitrage: Insights and Techniques for Successful Hedging, renowned investment expert Nick P. Calamos shows you ways to make the most of convertible arbitrage, explaining how to boost returns while decreasing risk–no matter what the market is doing.

The practice of convertible arbitrage takes advantage of the unique hybrid nature of convertible securities, which combine both fixed-income and equity characteristics. It typically involves matching a long position in convertible securities–usually convertible bonds–with a short position of corresponding stock. The bond pays interest and guarantees a yield upon maturity–but you also can participate in the movement of the underlying stock because a convertible bond’s option component makes it readily convertible into stock. Convertible arbitrage thus allows investors to create positions that achieve either market-neutral returns or that have a bias towards a security’s future price, offering tools to both the defensive and aggressive investor.

This not-to-be-missed guide gives you:

• A top-to-bottom overview of convertible arbitrage–its history, how it works, and why it is especially useful in a volatile market
• In-depth coverage of convertible valuation models and the "greeks," the statistical qualifications of convertible functions
• Reasons why the credit and business valuation of a convertible can make or break your hedge position
• A thorough review of convertible arbitrage techniques–from delta hedges and convertible option hedge techniques to swaps and nontraditional hedges
• An insider’s guide to portfolio risk management, including tips on portfolio evaluation, risk analysis, and optimization

The array of convertible securities available–and the ever-shifting financial engineering behind them–demands a practical working knowledge of convertible arbitrage hedging techniques. Not only does Convertible Arbitrage put those techniques at your fingertips, it also helps you use those techniques to prepare for–and profit from–new twists in convertible terms, types of securities, or derivative hedge products.

*Tremont Advisers, Inc.

"The Calamos Convertible Fund offers the Holy Grail in investing–a long-term return superior to the index with less volatility."
–William Harding, Analyst
Morningstar Investment Services

See all Editorial Reviews

Product Details

• Hardcover: 272 pages
• Publisher: Wiley; 1 edition (June 13, 2003)
• Language: English
• ISBN-10: 0471423610
• ISBN-13: 978-0471423614
• Product Dimensions: 9.4 x 6.3 x 1.1 inches
• Shipping Weight: 1.2 pounds (View shipping rates and policies)
• Average Customer Review: 4.0 out of 5 stars  See all reviews (12 customer reviews)
• Amazon Best Sellers Rank: #635,178 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

12 of 12 people found the following review helpful:

4.0 out of 5 stars Dont buy it if you are not in the trade or profession, October 13, 2004

By 

ServantofGod - See all my reviews

This review is from: Convertible Arbitrage: Insights and Techniques for Successful Hedging (Hardcover)

I am not saying this is not a good book. In fact, this is by far the best I had come across on Convertible Arbitrage. It's so informative and well written that it should be a handbook for hedge fund professionals or finance professors. However, it's far beyond the comprehension of the investment public who would surely be confused by the vast amount of greek alphabets, financial equations and graphs. Of course, for those affluent readers (time- and money-wise) who want to learn, say, Bearish Tilt Gamma Convertible Hedge, Vega Hedge thru Volatility Swap etc. despite the technicalities and scale issues facing individual investors, it's definitely not a bad bet.

8 of 8 people found the following review helpful:

5.0 out of 5 stars First True Practical Guide to Capital Structure Arbitrage, July 23, 2003

By A Customer

This review is from: Convertible Arbitrage: Insights and Techniques for Successful Hedging (Hardcover)

This book joins a number of 'hot' topic based books on convertible arb but makes itself stand out by being the first to truly discuss the details of the arbitrages, how to trade and hedge them and how to identify them efficiently.
Further credit (excuse the pun) should be given for extension into the CDS market and the use of more advanced credit hedging techniques.
A must read for any academic interested in studying the fixed income arbitrage markets and a useful reference for any practitioner who thinks he knows what is involved in running an arb book.

14 of 16 people found the following review helpful:

3.0 out of 5 stars Not the best book, May 16, 2005

By 

Analyst (Norway) - See all my reviews

This review is from: Convertible Arbitrage: Insights and Techniques for Successful Hedging (Hardcover)

To successfully employ convertible arbitrage, you need to value convertible bonds (CBs) correctly to be able to find underpriced CBs to buy, and then you need to know the number (delta) of stocks to short sell to hedge your position. How do you do this? The book correctly tells you that a binomial method must be used, but it spends only 10 pages or so on this matter! And even if you are proficient with binomial valuation, this description is quite poor and confusing. Most important though, the book does NOT cover the more complex attributes of convertible bonds (such as call and put provisions) that are very common. How can you expect to find underpriced CBs if you don't value them properly? If you truly want to learn convertible arbitrage, I instead recommend the book "Pricing convertible bonds" by Kevin Connolly who carefully explains all the things you need to know about the valuation of CBs, so that even if you have never heard about binomial trees you will still understand it (he also supplies a disc with excel files).