Striking gold or pitfalls in bond prospectuses

As convertible bond managers have increasingly sought to hedge out the hedgeable risks in their investments, the residual, unhedged risks are now assuming far more importance in deciding what is profitable and what is not.

The idea that prospectus risks could be viewed as a stand-alone discipline in the convertible bond (CB) market was pioneered in 2001 by Guernsey's, which published a list of 160 such risks.

The rationale for was that CB hedge funds could hedge equity risk, interest rates, and credit default risk but not prospectus risk. It simply didn't fit into the binomial models, but frequently was critical to the profitability of a trade. Its database has been

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