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, have received some notoriety after well-publicized losses. In this paper, several advanced issues relating to japanese-style convertible bonds are discussed. The convertible bonds, issued by Japanese and Taiwanese issuers (among others), have some unique features. Their price and hedge ratios depend on a variety of factors. These include the reset dates; the stock multiplier on each reset date, which 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.