Chinese Hedge

Chinese hedge

Applies mainly to convertible securities. Trading hedge in which one is short the convertible and long the underlying common, in the hope that the convertible's premium will fall. Antithesis of set-up.

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Chinese Hedge

In arbitrage, the practice of taking a short position on a convertible security and taking a long position on the underlying asset of that convertible security. The investor makes a Chinese hedge in hopes that the price of the underlying asset will fall, allowing him/her to profit from the decrease in the price of the convertible security. On the other hand, if the underlying asset rises in price, the investor profits from the increase as well. A Chinese hedge is also called a reverse hedge because it is the opposite of a set-up hedge.