Had a really interesting conversation with @matt_levine about the intersection of technology and finance, coming to an Internets near you in the not too distant future.
I definitely learned something; hope everyone will enjoy it.
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Specific interesting thing from about the first minute: I asked Matt what a convertible bond was for the audience and he gave the true technical answer (a bond which can be surrendered for stock at some agreed upon terms) and why it was interesting to companies.
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That reason: you should only convert the bond above some share price, which effectively means you have a call option on buying the stock. Call options are more valuable if volatility is high. This is well understood.
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Therefore, a borrower running a business with high variance (like a tech company with unproven model or a biotech firm) can get a loan which they’d probably not qualify for under traditional underwriting standards (“Where’s your cash flow?!”) by bundling implicit option premium.
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That’s kind of beautiful: the very fact that your business is risky de-risks the offering enough such that you can access the money necessary to take your risky shot.
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Replying to @patio11
Note that this is only true if the risk profile is symmetric. Some endeavours have large downside risks but limited upside; I wouldn't recommend that VCs buy convertible bonds in bank robbery, for example.
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I mean as a mathematical statement, no, the risk profile doesn't have to be symmetric at all for this instrument to be positive expected value. As to how finance people think about downside, any outcome other than bankruptcy means that they get paid more than they put in.
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Replying to @patio11
Let me rephrase that: There needs to be significant deviation from the mean in both directions for the argument "it's risky therefore the call option pays for the risk of bankruptcy".
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