What is a convertible arbitrage strategy?

Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds. It involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock. The number of shares sold short usually reflects a delta-neutral or market-neutral ratio.

Why do convertible bonds get repurchased?

Convertible bonds are corporate bonds that can be exchanged for common stock in the issuing company. Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.

What is convertible bonds in simple terms?

A convertible bond is a type of debt security that provides an investor with a right or an obligation to exchange the bond for a predetermined number of shares. Similar to regular bonds, a convertible bond comes with a maturity date and pays interest to investors.

Is convertible arbitrage a relative value strategy?

Relative value strategies seek to profit from mis-pricings of related securities. The plain vanilla convertible arbitrage strategy involves taking a long position in a convertible bond and shorting the issuer’s stock.

What are the advantages of convertible bonds?

Advantages of Convertible Bonds Companies reduce interest expenses due to lower interest rates. Companies avoid dilutive share issues. Investors enjoy a guaranteed income stream. Downside is limited because the investor can recoup their original investment when the bond matures.

What are the pros and cons of convertible bonds to a bond investor?

Convertible bonds: Best of both worlds?

Bonds: Pros	Bonds: Cons	Stocks: Pros
Principal protection	Exposure to market value loss from rising rates	Better long-term inflation hedge; tax efficiency
Traditionally lower volatility	Poor risk/reward trade off	Possibility of growing dividends

How is Delta convertible bond calculated?

To find the delta of a convertible you can apply the basic definition foe the derivative number : lim h->0, P(So+h)-P(So-h)/h, However because a lot of convertible are callable and putable you have to use this formula: P(So+h) – P(So-h) / 2h , with h=0.0001 for instance.

What is the accounting for issued convertible bonds?

what is the accounting for issued convertible bond? Bondholders exchange their convertible bonds for ordinary shares. The carrying amount of these bonds was lower than market value but greater than the par value of the ordinary shares issued.

What do you mean by index arbitrage?

Index arbitrage is a trading strategy that attempts to profit from the price differences between two or more market indexes. It can also be arbitrage between the instruments that track the index (e.g. index ETFs or options), and the components that make up the index.

How does convertible arbitrage work in the stock market?

Arbitrageurs can exploit the discount on convertible bonds while limiting exposure to unwanted risks, through the strategy of longing the convertible bond and shorting the underlying assets . To hedge the equity portion, we can short stock as the price rises, or cover additional stock if the price falls.

What happens when convertible bond is overpriced?

Conversely, if the convertible bond is overpriced relative to the underlying stock, the arbitrageur will take a short position in the convertible bond and a simultaneous long position in the underlying stock. If share prices increase, the gains from the long position should exceed the loss from the short position.

How is the Delta determined in convertible bond arbitrage?

Once the delta has been estimated, the arbitrageur can establish their delta position—the ratio of their stock-to-convertible position. This position must be adjusted continuously as the delta changes following changes in the price of the underlying shares.

When to take long or short position in convertible bonds?

If the convertible bond is cheap or undervalued relative to the underlying stock, the arbitrageur will take a long position in the convertible bond and a simultaneous short position in the stock. In the event that the price of the stock falls in value, the arbitrageur will profit from its short position.

What is a convertible arbitrage strategy? Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds. It involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock. The number of shares sold short usually reflects a delta-neutral or market-neutral ratio. Why do convertible bonds get repurchased?…