Market outlook by Lucror Analytics.
We describe an analysis which underpins the existence of the negative basis as a temporally stable source of income, based on historical price data of the assets in a negative basis fund. The analysis essentially relies on the computation of a correlation between primary and hedging assets, which can easily be conducted on an xls-sheet.
The article studies the possibility for analytically approximating the price of a convertible bond within defaultable Markov diffusion models. Since convertible bond pricing requires time-consuming finite difference or tree pricing methods in general, such proxy formulas can help to calibrate model parameters more efficiently. The derivation is based on the idea to “Europeanize” the American conversion option of the holder. Consequently, the quality of the approximations stands and falls with the value of the early conversion premium, and the resulting formulas in general may be viewed as (often quite sharp) lower bounds for the price.