Perl SWIG and Chinese convertible bonds

[Joseph Wang]

I'm in the process of creating a SWIG perl interface.  I was wondering
if someone is working on anything similar and if anyone has pointers for
writing the setup script.

Incidentally, I think I've found something interesting with my
mini-reasearch project with Chinese convertible bonds, which is what got
me into Quantlib.

The standard Western way of modelling CB's is a bond with a call
option.  However, I'm increasingly becoming convinced that one of the
main functions of convertible bonds on Shanghai is to function as a
stock + a put option.  This explains why the conversion price is set
close to the stock price.  As for why someone would want to use a
convertible bond as a put option rather than just issuing a put option,
it might have something to do with the fact that it is
difficult/impossible to issue a put option.

This nicely explains why people don't convert the bond immediately when
the stock price rises above the conversion price.   If you do that you
lose the value of the put option.  By contrast, I suspect that in
Western CB's, the option value of the CB is unimportant.  The initial
price of the stock is so much lower than the strike price, that the
option value of the CB is unimportant.  If the stock rises to the point
where conversion is a possibility, the bond is likely to be close to its
expiration date which means that the option value of the CB is again
unimportant.  Furthermore, the option value of the bond is probably
insignficant in comparison with issues involving default.

There are three consequences of this.

1) this shows how the same principles can be applied differently in
different markets, and the usefulness of having someone with area
experience to do quant work (hint, hint, I'm looking for a job, hint,
hint, nudge, nudge)

2) there is likely to be a wonderful arbitrage opportunity for someone
who can trade CB's and A shares in Shanghai.  The graphs I've seen which
compare the values of CB's and A shares are very noisy which means
overshoot, which means a lot of arbitrage possibilities.

3) the paper that got me thinking about this argued that the odd
behavior was due to inefficient markets.  If this train of thought is
correct, then it turns out that the Shanghai market is actually acting
very efficiently and rationally, which calls into question a lot of the
other negativity concerning stock trading in Shanghai.

Anyway, I'll trying to put together some working code to calculate
this.  The other project that I'm working on is trying to develop a
quantitative model of the massive stock reform project that is going on
in the PRC right now.

I should point out that the next few years should be a massive
opportunity for Quantlib in the PRC, as they are finally cleaning up the
securities system.  Over the next year, the National People's Congress
is scheduled to pass some key legislation which changes the Contract
Law, the Company Law, and the Bankruptcy Law to make asset backed
securities possible.  Right now the laws make it difficult to transfer
default rights from one person to another and this makes securitization
of debt largely impossible.

Once you have debt securitization, there is likely to be an explosion in
the issuance of asset backed securities with a consequential explosion
on risk management derivatives based on asset backed securities.  All
this suddenly thrust into an economy which does not have the software
infrastructure to value these things.  Enter Quantlib.....