Convertible hedge

Convertible Hedge

A position in which one owns a convertible bond in a publicly-traded company while also selling short the common stock in the same company. The idea behind a convertible hedge is to profit regardless of whether the common stock increases or decreases in price. If the stock goes up, the investor loses on the short sale, but can profit by exercising the conversion option on the bond and selling the underlying stock. If the stock goes down, the investor profits from the short sale and does not exercise the conversion option, keeping the coupon payments from the bond.

Convertible hedge.

When you use a convertible hedge, you buy a convertible bond, which you can exchange under certain circumstances for shares of the company's common stock. At the same time, you sell short the common stock of the same company.

As in any hedge, your goal is to make more money on one of the transactions than you lose on the other. For example, if the price of the stock falls, you're in a position to make money on the short sale while at the same time knowing that the convertible bond will continue to be at least as valuable as other bonds the company has issued.

On the other hand, if the stock gains value, you hope to be able to realize more profit from either selling the convertible or exchanging it for shares you can sell than it costs you to have borrowed and repaid the shares you sold short.

There are no guarantees this strategy or any other hedging strategy will work, especially for an individual investor who faces the challenge of identifying an appropriate security to hedge and the appropriate time to act.

References in periodicals archive ?
Privately Negotiated Convertible Hedge and Warrant Transactions
We remain confident that we will be successful in one or more of these prospects so we have also included a convertible hedge overlay to reduce dilution to our current TXCO stockholders.
0 million net cost of the convertible hedge and warrant transactions described below.
3 million paid as the cost of certain convertible hedge and warrant transactions entered into in connection with the debenture offering).
The Company intends to use the net proceeds from the issuance of the Convertible Notes to repay a portion of its existing floor plan borrowings under its Credit Facility, which may be re-borrowed, to repurchase up to $50 million of its common stock, and to pay the net cost of the convertible hedge and warrant transactions.
In a letter to the Limited Partners dated February 20, 2002, the General Partner shocked the public, the convertible hedge fund industry and the Limited Partners by revealing that the assets of the Partnership had been substantially overvalued and that the actual value of the assets of the Partnership would be devalued "in the neighborhood of 40%.
0 million of new convertible debentures in February, and Polar HEITs has a substantial position in a good, new convertible hedge.
1 million, after deducting the underwriters' discounts and estimated offering expenses payable by the company (including the cost of certain convertible hedge and warrant transactions entered into in connection with the debenture offering), assuming the underwriters do not exercise their option to purchase additional debentures or shares of class A common stock.
Access to key documents and the ability to efficiently navigate them is critical," said Michael Knox, the founder of Xtract Research and a former High Yield and Convertible hedge fund manager.
A convertible hedge transaction that has the effect of increasing the conversion premium on the New Notes to $5.
6 million of the net proceeds of the offering, representing the cost of the convertible hedge transaction partially offset by the proceeds of the call option transaction.
Weiser Investment Management Limited, Noddings Convertible Hedge Partnership and The Putnam Companies, had indicated to the representative, and the representative had indicated to Hadson, that such holder intended to vote to reject Hadson's plan.