If the stock price declined, the trader would benefit from the short stock position while the convertible bond would decline only slightly. The reason for the lower yield is that the investor has the option to either hold the bond until maturity or convert it into stock when the company's stock price rises to a pre-specified level. An equity long-short strategy is an investing strategy which involves taking long positions in stocks that are expected to increase in value and short positions in stocks that are expected to decrease in value. Convertible Arbitrage Zazove’s Convertible Arbitrage strategy seeks to provide bond-like returns with low volatility and low correlation to both fixed income and equity indices. A convertible security is an investment that has the option to be modified or changed into another type of investment. There is a substantial amount of information regarding convertible arbitrage and how you can use this strategy to produce non-directionally based profits in the market. We analyze whether a firm engages in combined offerings to reduce earnings per share (EPS) dilution, to signal its true value to the market, to move closer to its target debt ratio, or to finance a stock repurchase 2. program. Conversely, if the stock price rises, the loss on the short stock position would be capped or limited, because the gain on the convertible would partly offset it. Potential for upside participation and downside protection – Convertible bonds are uniquely positioned to offer the growth potential of stocks, but with the income and downside risk management characteristics of traditional bonds. lgt.com. If the stock rose before the security could be converted to stock, there could be a loss on the position. Easy to Use MS Excel Financial Models for All Types Trading. Synthetic Convertible Bond Arbitrage - "A Primer" The concept of synthetic convertible bond arbitrage is based on the traditional hedge fund strategy of what is called "convertible bond arbitrage". In essence hedge fund managers will purchase a convertible bond and then hedge that fixed income instrument by short selling the underlying equity in a hedged position. Top subscription boxes – right to your door, © 1996-2020, Amazon.com, Inc. or its affiliates. Basically, convertible arbitrage is a market related activity which helps hedge funds to perform better which is something … Convertible arbitrage involves purchasing a portfolio of convertible securities-generally convertible bonds-and hedging a portion of the equity risk by selling short the underlying common stock. This increasingly popular strategy, which is especially useful during times of market volatility, allows individuals to increase their returns while decreasing their risks. New Look, Same Trusted Formula, KILZ 2 ALL New Look, Same Trusted Formula, KILZ 2 ALL PURPOSE 1 Gal. Yale Law School. The goal of the convertible arbitrage strategy is to capitalize on pricing inefficiencies between the convertible and the stock. Convertible bonds also have a specific amount that it is converted into as well as at a pre-determined time. Delivered as CD-ROM. Assuming there are no barriers to conversion, an arbitrageur would buy the convertible and simultaneously short the stock, for risk-less profits (excluding transaction costs) of $1 per $100 face value of the convertible. More specifically, it is used by hedge funds. 2. Convertible arbitrage hedge funds have played an important role in the convertible bond market, especially since the beginning of the 21st century. The simplest example is when an asset is traded at different prices on different markets. KILZ 2 ALL PURPOSE primer also blocks light to medium stains and provides a mildew resistant coating. 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