Delta-neutral names still stack into book-level equity, vol, credit, and rate exposures—and leverage turns small residual Greeks into prime-broker conversations. Calamos Ch. 10 starts with balance-sheet leverage, then uses scenario worksheets to expose the shocks a smooth daily P&L history hides. The Handbook's VaR and stress-testing sections supply the vocabulary, but the convert desk needs a revaluation of the actual packages.
This note sets the book dashboard: gross and net leverage, haircut-adjusted capacity, aggregate Greeks, ordinary factor shocks, and a deliberately ugly joint crisis. The next lesson separates the mechanics of systematic overlays from this decision framework.
Learning objectives. By the end of this note you should be able to:
- define gross/net leverage for long-convert / short-stock packages;
- build a scenario stack (spot, vol, credit, rates, liquidity);
- explain Nick-style skepticism of naive VaR for convert books;
- design book-level hedges that cancel aggregated tilts;
- distinguish an economic loss from a financing-capacity loss in the same scenario.
In this lesson
- Leverage
- Scenarios over VaR
- Book-level hedges
- Limits are decisions, not forecasts
Before you start
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