Replicating a Reverse Convertible with Bond Options and Digital Payoffs

# Simulating a Reverse Convertible Note on DLIB using BLAN


# Simulating a Reverse Convertible Note on DLIB using BLAN












Bonjour, i recently found out of the existence of DLIB on Bloomberg where one can simulate pricing and various risk analysis for derivatives and structured products. there are several templates depending on the kind of structured product. I need to simulate and price a Reverse Convertible Note having a US Treasury Bill as underlying, and unfortunately there isn't a template for RCNs with fixed income underlying. I see that one can create an ad-hoc template using BLAN. can anyone tell me how to do that? or refer me to a good guide on how to use BLAN? that would be even better

Thanks a lot

## Answer by AKdemy (score 3)

https://quant.stackexchange.com/a/82354

I agree it's best to ask the help desk. A guide for BLAN can be found on the help page of DLIB. It's quite intuitive and simple and really mostly OCAML with some built in functions.

That said, I am not at work this week but I don't think T-bills work at all. You have no vol surface, and not even market data in DLIB.

Usually any supported ticker works in any template because it's independent of the underlying and just adjusts the pricing model accordingly. If it doesn't work with a T-Bill it's because the underlying isn't supported (I think it should mention this in a warning somehow).

I believe there is a readily available BLAN template for RC, where you see the BLAN code. You just need to add the variables from the template itself to get a working BLAN code. However, as mentioned, I don't think that would work in any case with a T-Bill.

That's probably about as far as the help desk will go, because in my experience, any WAPI (programmatic API) or BLAN questions aren't answered and you are just refered to the guides (which are quite comprehensive and useful).

What I think you can do is to replicate the RC in OVME. You can definitely price options on bonds in OVME with Black-76, similar to TYU. Again lacking IV (it just uses some historical vol data) but that's what it is with such an illiquid option type. We frequently use this as a quick tool to double check our internal pricing for put options on government bonds that we frequently sell.

You should also be able to replicate a standard RC with "vanilla" options, at least as long as you don't have coupon payments because the payoff is just:

> If Performance of the underlying at expiry <= barrier then 100 - 100 * max(0, 1 - Performance of the underlying) else 100.

Therefore, you can enter a two leg strategy:

- buying a call on a very low strike cash or nothing digital (which will pay 100), while simultaneously

- selling a terminal knock-in put with a down-in barrier.

I think coupons, also with a barrier should work as well, by adding more legs, each for a specific coupon (again with a digital, say with paying 5 bonds instead of 100 to get 5% coupon per year, and setting the barrier accordingly).

Just bear in mind, I think T-bills will have to be entered in 1000 increments. So USD 10 Mio. should be 10.000 shares.

If you try this, just use an equity / index ticker first so that you can match DLIB with OVME. Afterwards, try a vanilla bond option to see if it's indeed 1000 increments (manually price with Black-76 and the market data displayed in OVME with a programming language of your choice).