You have bought the exchange-listed convertible bonds of a company today on Jan 2,20X1, immediately after...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You have bought the exchange-listed convertible bonds of a company today on Jan 2,20X1, immediately after the coupon payment. The bond has the following features: Coupon rate of 5.80% (compounded semi-annually, coupon payable every six months); yield-to-maturity of 4.15% (compounded semi-annually); maturity on Jan 2 of 20X9; and coupon payable on every Jan 2 and Jul 2. Each $1,000 face value convertible bond converts into 30 company shares. Comparable plain-vanilla (non- convertible) bonds with the same maturity, coupon, and credit risk are yielding 5.05% compounded semi-annually. The company shares are currently trading at $35.71 per share. The company doesn't pay any dividend. The delta of long-dated, at-the- money call options on the company's shares is 0.573 and is not expected to change with short-term changes in prices of the underlying. If you want to implement a convertible arbitrage strategy with full delta hedging, how many total shares of the company must you sell SHORT today for the 380 convertible bonds you have purchased on the LONG side? Round up to the next whole number of shares if you get a fractional answer. You have bought the exchange-listed convertible bonds of a company today on Jan 2,20X1, immediately after the coupon payment. The bond has the following features: Coupon rate of 5.80% (compounded semi-annually, coupon payable every six months); yield-to-maturity of 4.15% (compounded semi-annually); maturity on Jan 2 of 20X9; and coupon payable on every Jan 2 and Jul 2. Each $1,000 face value convertible bond converts into 30 company shares. Comparable plain-vanilla (non- convertible) bonds with the same maturity, coupon, and credit risk are yielding 5.05% compounded semi-annually. The company shares are currently trading at $35.71 per share. The company doesn't pay any dividend. The delta of long-dated, at-the- money call options on the company's shares is 0.573 and is not expected to change with short-term changes in prices of the underlying. If you want to implement a convertible arbitrage strategy with full delta hedging, how many total shares of the company must you sell SHORT today for the 380 convertible bonds you have purchased on the LONG side? Round up to the next whole number of shares if you get a fractional answer.
Expert Answer:
Answer rating: 100% (QA)
To implement a convertible arbitrage strategy with full delta hedging we need to sell short a certai... View the full answer
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9781265553609
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
Posted Date:
Students also viewed these finance questions
-
Leticia has been tracking two volatile stocks. Stock A over the last year has increased 10%, and stock B has increased 14% (using a simple interest model). She has $10,000 to invest and would like to...
-
Case Study 1?1 Amazon in 2019 Answer the five questions at the end of the case. Thepurpose of this case, and others you will be assigned, is toillustrate the application of the concepts covered in...
-
Lynn Swartz's husband died three years ago. Her parents have an income of over $200,000 a year and want to ensure that funds will be available for the education of Lynn's 8-year-old son Eric. Lynn is...
-
Selected condensed data taken from a recent statement of financial position of Morino Ltd. are as follows. Morino Ltd. Statement of Financial Position (partial) Other current assets...
-
What are the functions in (a) executing, (b) recording, and (c) custody of payroll transactions?
-
The August 31 bank statement of Winchesters Healthcare has just arrived from United Bank. To prepare the bank reconciliation, you gather the following data: a. The August 31 bank balance is $4,870....
-
8. Write a Relational Algebra expression to represent the following SQL statement: select building, room_number, section.course_id, title from section, time_slot, course where section.time_slot_id =...
-
The bar codes above represent locations in a warehouse. How many units would be left in each location? If you picked 250 units from location 00000113774360000 If you picked 250 units from location 00...
-
Vigeland Company completed the following transactions during Year 1. Vigeland's fiscal year ends on December 31. Purchased and paid for merchandise. The invoice amount was $14,200; assume a perpetual...
-
Sterling Inc. has decided to purchase equipment from Central Industries on January 2, 2015, to expand its production capacity to meet customers demand for its product. Sterling issues a $900,000,...
-
Rockland Corporation earned net income of R$300,000 in 2015 and had 100,000 ordinary shares outstanding throughout the year. Also outstanding all year was R$800,000 of 10% bonds, which are...
-
Yilmaz Company is provided a grant by the local government to purchase land for a building site. The grant is a zero-interest-bearing note for 5 years. The note is issued on January 2, 2015, for 5...
-
Mask Company has 30,000 shares of 10 par value ordinary shares authorized and 20,000 shares issued and outstanding. On August 15, 2015, Mask purchased 1,000 shares of treasury shares for 18 per...
-
DiCenta Corporation reported net income of 270,000 in 2015 and had 50,000 ordinary shares outstanding throughout the year. Also outstanding all year were 5,000 shares of cumulative preference shares,...
-
The following information pertains to Havana Corporation's defined benefit pension plan: ($ In 000s) 2016 2017 Beginning balances Beginning balances ($6,504) ($6,000) 5,760 Projected bernefit...
-
Draw a Feynman diagram for the reaction n + v p + .
-
A 15-year annuity pays $1,750 per month, and payments are made at the end of each month. If the APR is 9 percent compounded monthly for the first seven years, and APR of 6 percent compounded monthly...
-
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year ............................ Unit Sales 1 .................................... 71,000 2...
-
You own 1,000 shares of stock in Avondale Corporation. You will receive a $3.45 per share dividend in one year. In two years, the company will pay a liquidating dividend of $62 per share. The...
-
Find each probability using the standard normal distribution. (a) \(P(z>-1.68)\) (b) \(P(z <2.23)\) (c) \(P(-0.47
-
Are you more likely to randomly select one person with an IQ score greater than 105 or are you more likely to randomly select a sample of 15 people with a mean IQ score greater than 105? Explain. In...
-
What is the lowest score that would still place a person in the top \(5 \%\) of the scores? In a standardized IQ test, scores are normally distributed, with a mean score of 100 and a standardized...
Study smarter with the SolutionInn App