Delta of a Convertible Bond

CFA Level III Fixed Income
#1

Hi All

In page 35 of Reading 26 : Strategy Implementation for Convertible Bonds the text says " For convertible bonds with high bond conversion prices relative to the conversion value, the delta will be close to 1. For convertibles with low bond conversion prices relative to the conversion value, the delta will be closer to 0" trying to understand why delta is close to one for bonds with high CP relative to CV

Could someone please explain. Thanks.

#2

When bond conversion price is high relative to conversion value, it implies that the share price is higher than the strike price of the call option, hence the option is in the money, so delta will be close to 1.

When bond conversion price is low relative to conversion value, it implies that the share price is lower than the strike price of the call option, hence the option is out the money, so delta will be close to 0.

#3

Thanks for the help Fino, my understanding is that the Coversion Price is par value / conversion ratio ( this is the strike price) & Conversion Value is Conversion Ratio * the current stock price.

Still trying to understand why a higher strike price would imply a delta close to 1 , I guess i am missing something or the way i understand this is totally wrong. Could you please help. Thanks.

#4

Apparently, for Level 3, the author uses:

  • Conversion value = conversion ratio x strike price

  • Conversion price = conversion ratio x share price

You can refer to the curriculum to confirm.

#5

Thanks a lot Fino for the clarification.

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