Embedded optionality · Credit-equity basis · DecompositionA convertible bond is a corporate bond with an embedded equity option. Our systems decompose each convertible into its fixed-income and option components, value each separately, and identify mispricings between the sum of parts and the market price. When the embedded option trades at a significant discount to comparable listed options, the analytical opportunity exists.
The core analytical framework involves valuing the convertible and measuring the equity exposure implied by its delta. This isolates the pure volatility and credit spread exposure. As the underlying moves, the hedge ratio must be continuously recalibrated — generating realised volatility signals when observed volatility exceeds the implied volatility embedded in the convertible's price.
Convertible analysis carries credit risk: if the issuer defaults, the value of the bond is impaired. Our data analysis systems evaluate the credit quality of convertible issuers by analysing financial indicators, ratios, and risk profiles. Signal confidence is weighted according to the joint probability of the convertible being mispriced and the issuer remaining solvent.