Japanese Reset Convertible Bonds and Other Issues in Convertible Bonds

Abstract

Convertible bonds are simply a generic classification for fixed-income securities convertible into a wide range of alternative security forms. One special form, Japanese reset convertibles, has received some notoriety after well publicized losses. In this article, several advanced issues relating to Japanese – “style” convertible bonds are discussed. The convertible bonds issued by several Japanese and Taiwanese issuers (among others) have some unique features. Their price and hedge ratios depend on a variety of factors, including the reset dates, the stock multiplier on each reset date that is used to determine the conversion price, and the minimal (and maximal) amounts by which the conversion price can be modified. These relationships are quite complex and an adequate model is essential.