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Why this is the case that the bond moves more than stock hedge? What is it mean a drop in the stock price leads to
Why this is the case that the bond moves more than stock hedge? What is it mean "a drop in the stock price leads to a larger drop in the value of the hedge than the value of the convertible bond."?
The convertible bond value increases by more than the stock hedge when the stock price goes up. When the stock price drops back, why isn't the initial profit simply reversed? - The initial profit would be reversed if the hedge had not been adjusted in the meantime. - It is the change in the hedge that makes the difference: With the stock price at 85 , the initial hedge is no longer appropriate. - This is because the convertible bond is now more in-the-money, that is, more certain to be converted; it has therefore become more equity sensitive. Hence, the correct hedge has increased. - Given this new hedge, a drop in the stock price leads to a larger drop in the value of the hedge than the value of the convertible bondStep by Step Solution
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