[Quantlib-dev] Perl SWIG and Chinese convertible bonds

[Joseph W. <jo...@co...>]

I'm in the process of creating a SWIG perl interface.  I was wondering 
if someone is working on anything similar and if anyone has pointers for 
writing the setup script.

Incidentally, I think I've found something interesting with my 
mini-reasearch project with Chinese convertible bonds, which is what got 
me into Quantlib.

The standard Western way of modelling CB's is a bond with a call 
option.  However, I'm increasingly becoming convinced that one of the 
main functions of convertible bonds on Shanghai is to function as a 
stock + a put option.  This explains why the conversion price is set 
close to the stock price.  As for why someone would want to use a 
convertible bond as a put option rather than just issuing a put option, 
it might have something to do with the fact that it is 
difficult/impossible to issue a put option.

This nicely explains why people don't convert the bond immediately when 
the stock price rises above the conversion price.   If you do that you 
lose the value of the put option.  By contrast, I suspect that in 
Western CB's, the option value of the CB is unimportant.  The initial 
price of the stock is so much lower than the strike price, that the 
option value of the CB is unimportant.  If the stock rises to the point 
where conversion is a possibility, the bond is likely to be close to its 
expiration date which means that the option value of the CB is again 
unimportant.  Furthermore, the option value of the bond is probably 
insignficant in comparison with issues involving default.

There are three consequences of this.

1) this shows how the same principles can be applied differently in 
different markets, and the usefulness of having someone with area 
experience to do quant work (hint, hint, I'm looking for a job, hint, 
hint, nudge, nudge)

2) there is likely to be a wonderful arbitrage opportunity for someone 
who can trade CB's and A shares in Shanghai.  The graphs I've seen which 
compare the values of CB's and A shares are very noisy which means 
overshoot, which means a lot of arbitrage possibilities.

3) the paper that got me thinking about this argued that the odd 
behavior was due to inefficient markets.  If this train of thought is 
correct, then it turns out that the Shanghai market is actually acting 
very efficiently and rationally, which calls into question a lot of the 
other negativity concerning stock trading in Shanghai.

Anyway, I'll trying to put together some working code to calculate 
this.  The other project that I'm working on is trying to develop a 
quantitative model of the massive stock reform project that is going on 
in the PRC right now.

I should point out that the next few years should be a massive 
opportunity for Quantlib in the PRC, as they are finally cleaning up the 
securities system.  Over the next year, the National People's Congress 
is scheduled to pass some key legislation which changes the Contract 
Law, the Company Law, and the Bankruptcy Law to make asset backed 
securities possible.  Right now the laws make it difficult to transfer 
default rights from one person to another and this makes securitization 
of debt largely impossible.

Once you have debt securitization, there is likely to be an explosion in 
the issuance of asset backed securities with a consequential explosion 
on risk management derivatives based on asset backed securities.  All 
this suddenly thrust into an economy which does not have the software 
infrastructure to value these things.  Enter Quantlib.....