Delta
Delta measures the sensitivity of the price of a convertible bond versus the price of the underlying stock into which it converts.
Measured between 0 and 1 (and often expressed in percentage terms); the convertible bond’s delta approaches 1 as the embedded call option moves deep in-the-money and this indicates the bond will move up or down by the same proportion of change in the underlying stock.
Conversely, a Delta of 0 suggests the embedded call option is deeply out-of-the money and the convertible will behave like a corporate bond, with no equity sensitivity.
For a balanced convertible, a Delta of 50% implies the convertible bond will increase by 50% of the equity move i.e. +5%, if the stock is +10%.
Gamma
Gamma is a second-order Greek. It describes the sensitivity of a convertible bond’s Delta to the price of the underlying security into which it converts.
“The Delta of Delta.” I.e. Delta is not a static measure, hence the need to consider Gamma to determine the price change for a large move in the stock.
Gamma is also known as Convexity and the greater the figure, the greater the bond’s asymmetry - typified by a higher upside/downside capture [of equity moves].
A Gamma of more than 0.75 would be considered to offer a good level of return asymmetry.
Omega
Omega measures the sensitivity of the price of a convertible bond to a change in implied credit spreads.
Omega varies from -1 to 1, which measures the proportionate change in the convertible bond’s price for a 1 basis point change in its credit spread.
Rho
Interest rates affect both the corporate bond component and the embedded call option. Rho is used to describe the sensitivity of a convertible bond’s price to a change in an equal move of all interest rates along the yield curve.
Rho is measured from -1 to 1, which measures the proportionate change in the convertible bond’s price for a 1 basis point parallel shift in the yield curve.
As a general rule - longer maturity bonds tend to have a higher duration (more sensitivity to interest rates changing over the long life of the bond).
Theta
Theta measures “time decay”. For every trading day that the underlying share price closed below the strike price (the conversion price) - and an investor would not choose to convert - the bondholder’s option has thus lost a day’s value.
Hence, all convertible bonds with call options have a negative theta. Theta changes in response to changes in the other Greeks and reduces as time to maturity draws nearer.
Theta is measured from -1 to 1. which measures the proportionate change in the convertible bond’s price per day based on time decay.
Vega
Vega measures the sensitivity of the price of a convertible bond to a change in the implied volatility of the underlying stock into which it converts.
Because convertible bonds have embedded call options (the right to convert into shares if a pre-determined share price is reached), we use this derivative term to describe the implied move in the bond’s price for a 1% change in the implied volatility of the stock.
Parity Delta (aka Equity Sensitivity)
Expanding on the Delta section above…
Equity sensitivity takes into consideration purely the equity component (“parity”: which is what you would receive in share value, upon conversion today).
Parity Value = current share price x conversion ratio
therefore parity delta (equity sensitivity) = Parity Value x Delta.