The theory of Implied Volatility for FixedResets was published in the 2013 edition of PrefLetter and made public last year.
It has now been updated with further explanations, examples and discussion and the 2016 edition may be downloaded by clicking here.
The calculator (an Excel Spreadsheet) has been publicly available for some time, linked on the right-hand navigation panel under the heading “Calculators”.
Many readers will wish to read the companion essay Implied Volatility for Straight Perpetuals as it is conceptually similar with fewer parameters.
Excellent newsletter! I have got into preferred investing in the last few months as the fixed rate reset market appears the most irrationally priced of any asset class.
The section Effects on Proximity to Par value explains a lot. The lower priced fixed rate resets appear to be priced the cheapest as a lower price signals to retail investors that something must be too good to be true. I have tried to explain the situation in the market to some investing friends and they can’t wrap their head around the potential for capital appreciation in a preferred share.
Have you contemplated how resets might be priced if we see a negative GOC 5 year bond? I wonder if the prospectuses of the securities have a floor rate?
Excellent newsletter!
Thank you!
Have you contemplated how resets might be priced if we see a negative GOC 5 year bond? I wonder if the prospectuses of the securities have a floor rate?
We’ve just had a short discussion on that in the comments to the post New Issue: NA FixedReset, 5.60%+490
If GOC-5 yields decline below zero, I think things will be done according to normal arithmetic: if something with an Issue Reset Spread of +200 resets when GOC-5 is -0.50%, then it will pay at a rate of 1.50%.
It’s when the actual calculated reset rate is below zero that things get interested. I think that such an instrument will simply pay zero, but nobody really knows.
I don’t think it will become an issue, because I can’t see GOC-5 going below the very lowest Issue Reset Spread issue’s zero point. But hey – when these puppies were issued, negative yields were discussed only by those looking for a cheap laugh or a bizarre duration calculation!
I’ve been working with your calculator and feel like I have a decent idea of how it works now. Excellent work sir!
I am having a problem updating the calculator though and hope you can help. Take the TRP tab, for example. There is one TRP issue missing and I don’t seem to be able to add it without causing a run type 13 error (type mismatch). Is there a trick to adding new issues to keep the calculator up to date?
[…] objectionable part of this plan becomes clear once we start looking at the Implied Volatility of the FixedResets. One thing is very clear: given the higher coupon on the new issue, it may be expected to trade at […]