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It's all in the price

After more than a decade of trying, convertible bonds have emerged as a genuine asset class in Europe. At the same time, a once-vibrant Asian market is in reverse. But in both markets there is evidence that participants are struggling to keep up with the sophistication of the product. An overly simplistic approach can be disastrous. By James Rutter.

Zapped by negative gamma in Japan

Shareholder value is a convertible issue

The launch of the first convertible bond to be denominated in euros coincided with Europe's spring fashion shows. Impeccable timing, given that both the currency and the product are definitely en vogue in the capital markets this season. The reason is simple: "If both [equity and debt] markets are doing well you get supercharged returns on convertibles," says Simon McGuire, managing director and global head of equity-linked origination at SBC Warburg Dillon Read.

It's a contrasting outlook to the traditional view of convertibles, summed up by one equity portfolio manager as "dull equity, spicy debt". But over the past six months the global convertibles market has been anything but dull, and not only from the perspective of the conservative fixed-income investor.

The excitement has been a mixture of western thrills and eastern spills. "In Europe, stars have come into line which have created the perfect conditions for the convertible bond market," says Peter Warren, head of convertible bond research at Goldman Sachs. "In Asia, the exact opposite has occurred." But underlying the ferment in both markets is the flexibility and complexity of the product, and the degree to which participants appreciate its possibilities.

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