Convertible Arbitrage

Convertible Arbitrage

An investing strategy that involves the long position on a convertible security and a short position in its converting common stock.

Notes:

This strategy attempts to exploit profits when there is a pricing error made in the conversion factor of the convertible security.

See also: Arbitrage, Common Stock, Conversion Price, Convertible, Short

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Convertible Arbitrage

In the context of hedge funds, a style of management that involves the simultaneous purchase of a convertible bond and the short sale of shares of the underlying stock. Interest rate risk may or may not be hedged.

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Convertible arbitrage

A practice, usually of buying a convertible bond and shorting a percentage of the equivalent underlying common shares, to create a positive cash flow position (with expected returns above the riskless rate) in a static environment and benefit from capital appreciation should the convertible's premium rise. This form of investing is far from riskless and requires constant monitoring. See: Chinese hedge and setup