Knowledge that Transforms

An overview and brief history of swaps markets the generic swap structure interest rate swaps currency swaps commodity swaps and equity swaps swaps, structured solutions and financial engineering the pricing and interest rate swaps managing a swap portfolio hedging business cycle risk - the next major wave in derivatives.

Recent studies using aging analysis have found high rates of default for rated, nonconvertible high-yield bonds. This paper examines the remainder of the market and concludes that rated and nonrated convertible high-yield bonds had significantly lower default rates. It also provides some evidence that nonrated, nonconvertible securities may have lower default rates. Even after controlling for issue size and coupon rates in a logit model, these differences remain statistically significant.

In this paper, we examine the warrant price and stock price reactions to the announcement of warrant life extensions. As predicted by option-pricing theory, warrant prices increase in response to an extension. Our principal finding is that the stocks of firms making the extension announcements experience positive abnormal returns on average. We interpret the evidence as supportive of an anticipation hypothesis in which the market perceives the decision to extend the warrants' expiration date as a favorable indication for the stock price before the subsequent expiration.

This paper examines the timing of, and reaction to, calls of callable warrants. Three main findings emerge. First, unlike convertible bonds or preferred stock, callable warrants are called almost as soon as possible. Second, there is a negative price reaction of about 3 percent when a call is announced. Finally, at the completion of a call, the stock price rebounds by an average of 7 percent. The total reaction from announcement through completion of the call is a positive excess return of about 4 percent.