A convert arb book does not start by asking "what is delta?" — it asks where the market price sits relative to two numbers: the bond floor (investment value) and parity (conversion value). Those boundaries, and the premiums above them, are the coordinate system for moneyness, hedge behaviour, and later "cheapness to model." This note makes the geometry precise, including the uncomfortable fact that the floor is not a floor when credit collapses with the stock.
Learning objectives. By the end of this note you should be able to:
- compute investment value as a credit-adjusted PV of coupons and principal;
- compute parity and both investment and conversion premiums;
- sketch the convertible price track and locate busted / balanced / equity-like regimes;
- explain why negative gamma appears when the bond floor fails.
In this lesson
- The two boundaries
- Premiums
- Profile graph and moneyness regimes
Before you start
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