Lecture 3 - Equity-linked Capital Markets v2

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1、Lecture3:Equity-linkedCapitalMarketsRoseKay1OPTION2Definitions–OptionsCallOption•Theholderofacalloptionhastheright(butnottheobligation)tobuyasecurityatapre-specifiedtime(expiration)andprice(strike)
Payoff=Max(0,St–K)St=Priceoftheunderlyingatmaturity;K=StrikePriceEarlyexerc

2、isefeatures•EuropeanOptions:Maybeexercisedonlyontheexpirationdate•AmericanOptions:MaybeexercisedatanytimebeforeexpirationCallOptionPayoff=Max[0,St-K]OTMITMPayoffatmaturityOptionExercisePriceStockPriceatmaturity13TheGreeksIncreaseinCallPutStockPrice+–StrikePrice–+TimetoExpi

3、ration++UnderlyingAssetVolatility++Risk-freeFinancingRate+–Dividends–+•ChangesinTimetoExpirationandAssetVolatilityhaveidenticaleffectsoncallandputvalue,whilechangestootherfactorsaffectcallsandputsdifferently54INTRODUCTIONTOEQUITYLINKEDSECURITIES5WhatareEquityLinkedSecuriti

4、es?•Hybridsecurities–bothequityanddebtcharacteristics•Convertiblebond•Exchangeablebond•Warrants:Anoptiontobuy/subscribeforsecurities6WhatisaConvertibleBond?•Convertibledebtisatypeofbondthatcanbeconvertedintocommonsharesatapre-setstockpriceDiscountBondCallOptionConvertibleB

5、ondPeriodiccashflow(“coupon”)RighttopurchaseSumofthewithastockatapre-DiscountBondrepaymentofdeterminedprice+principalatpriortomaturityCallOptionmaturity
Couponislowerthanona
Embeddedvalueofoptioncorrespondingstraightdebtcompensatesinvestorsforreducedinstrumentcoupon7Whatis

6、aConvertibleBond?•AconvertiblebondisacorporatebondthatisconvertibleattheInvestor’soptionintoaspecifiednumberofIssuer’sshares•Itcanbesynthesizedasthesumof:-Acorporatebondplus-AnAmericanequitycalloptiononIssuer’sshares•TheupfrontpremiumthattheInvestorpaysfortheequityoptionsu

7、bsidizesthecashcouponofthecorporatebondcomponent8ConvertibleBonds:CosttoIssuers•Aconvertibleistypicallyissuedwith:–Acouponsubstantiallylowerthantheissuer’sstraightdebtrate–Aconversionprice20-40%abovethecurrentstockprice•Anissuerdelivers:–Couponthroughoutthelifeofthesecurit

8、yandparatmaturity–Anyequityvalueabovetheconversionprice9BenefitstoIssuer•Upfrontpaymentfo