Risk USA 2003: convertible bond replication soon possible, says hedge fund chief risk officer
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“It's starting to work,” said Vinci, referring to building liquidity in the credit default swaps market and the theoretical innovation represented by the linkage of equity volatility and credit spreads. “One of the final pieces would be if dealers start offering more longer-dated equity options – the replication possibility in convertibles would become even better,” he said, noting that long-dated equity options trades cannot currently be done in size.
Earlier, Vinci said that while replication of convertible bonds with other corporate securities and their derivatives – capital structure arbitrage – could lead to tight enough pricing to allow the replication of more instruments with each other, vested interests, such as dedicated long-only single asset class trading firms and dealing desks, would form a natural point of resistance against the development.