Pricing, Processing and Risk Management for Convertible Bonds
Convertible bonds (CBs) provide an excellent way for companies to issue relatively cheap debt instruments, with interest rates below those offered by classic bonds. There is also a reduced cash interest payment when CB products reach their maturity threshold. For investors, investing in CBs represents a measured exposure to a company while benefiting from its growth if the stock performs in the future.
CBs are common products on the financial market, and are traded by all kinds of investors and institutions. But they are complex products and one of the first hybrid products that were exchanged in the market: they combine equity, fixed income and credit features. Other features can be added to the "vanilla" CB, such as perpetual convertible bond, issuer call, or dividend protection.
Many parameters need to be taken into account to manage these products correctly. The main challenge is to have a precise pricing model in place.
Our expertise
Based on its 20 years' experience supporting CB trading, Sophis is capable of handling all the standard features for those products and also provides a robust and precise pricing engine. This is included in a front-to-back solution that offers portfolio and risk management as well as processing capabilities. It offers the following:
- Cross asset pricing model coverage
- Management of local specificities
- Integrates new clauses that appear constantly within the pricing engine
- Collects and integrate a wide amount of precise data that will influence the pricing parameters
- Sophis provides CB data via its product Sophis CB: Initial set up of convertible bonds database and automatic updates via Web Services
- Update from other external sources of static and market data of financial products that interfere in the CB's pricing, such as bonds, equity, credit data, volatilities, dividends
- User friendly GUI, reflecting years of CB trading experience.
By providing comprehensive coverage of CB management Sophis allows all market participants, whether in the banking, fund or corporate industry, to manage CB products with state of the art solutions.
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