What happens to the value of a convertible callable and putable bond (all in one) when interest rate volatility and stock price volatility increases?
Straight
+ call on stock
- call on bond
+ put on bond
It looks like the call on the stock would increase (increasing convertible bond value) but then would the call on bond and put on bond effect cancel out ? so the net effect is an increase in the convertible bond?
Call on the stock would increase, increasing value of the bond to the investor.
Call on the bond would increase, decreasing value of the bond to the investor
Put on the bond would increase, increasing value of the bond to the investor.
I do not think you can figure out the net effect. You would need to use real figures and net effect would be different depending on the price of each option, call price, etc.
the effect of interest rate volatility on a stock option is marginal.
however, options on fixed income are sensitive to interest rates. rising rates will lower the value of the second call option