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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.
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
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
An investment strategy in which one buys a convertible bond and short sells the underlying common stock. The idea behind convertible arbitrage is to profit from inefficiency in the pricing of the convertible bond. However, convertible arbitrage is risky and requires monitoring because the pricing inefficiencies may only be temporary. It is a strategy associated with hedge funds. See also: Chinese hedge.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved