Cheapness is model-relative. the preceding material gave bond floor and parity; this topic builds the theoretical price track an arb desk compares to the market — from break-even and convexity intuition, through credit-aware binomial trees, multinomial refinements, and the Greeks that become hedge ratios. The organising output is a model price and its sensitivities; the preceding material trades .
By the end of this note you should be able to:
- compute break-even analytics and explain why bond-plus-Black–Scholes is not enough;
- price an optional convertible by backward induction on a CRR-style tree with conversion and call;
- compare whole-claim risky discounting, TF splits and an explicit AFV-style survival/default tree;
- read share delta and finite-bump Greeks from the engine, and identify their grid and bump instability.
In this lesson
- Contents
- The big picture
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