Convertible Bond Arbitrage

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Dictionary Says

Definition of 'Convertible Bond Arbitrage'

An arbitrage strategy that aims to capitalize on mispricing between a convertible bond and its underlying stock. The strategy is generally market neutral; in other words, the arbitrageur seeks to generate consistent returns with minimal volatility regardless of market direction through a combination of long and short positions in the convertible bond and underlying stock.

Investopedia Says

Investopedia explains 'Convertible Bond Arbitrage'

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. 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.

The price of a convertible bond is especially sensitive to changes in interest rates, the price of the underlying stock, and the issuer's credit rating. Therefore, another type of convertible bond arbitrage involves buying a convertible bond and hedging two of the three factors so as to get exposure to the third factor at an attractive price.
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'Convertible Bond Arbitrage'

  • Convertible Securities In Today's Market

    http://stocks.investopedia.com/stock-analysis/2009/Convertible-Securities-In-Todays-Market-CLMS-JNJ-RIG-AMGN-HD0430.aspx
    ... which ended last year), hedge funds would participate in trades called convertible
    arbitrage. This involved buying the underlying convertible bond and shorting ...

  • What is a Chinese hedge?

    http://www.investopedia.com/ask/answers/09/chinese-hedge.asp
    A Chinese Hedge is a form of arbitrage by which an investor shorts a convertible
    bond and buys the underlying common stock. The inverse of a Set-Up. ...

  • Hedge Funds Hunt For Upside, Regardless Of The Market

    http://www.investopedia.com/articles/03/112603.asp
    ... For example, convertible arbitrage entails buying a corporate convertible bond,
    which can be converted into common shares, while simultaneously selling short ...

  • Series 7 Study Guide - Packaged Securities - Introduction ...

    http://www.investopedia.com/exam-guide/series-7/packaged-securities/default.asp
    ... from the restructuring. Convergence Trading: Fixed Income Arbitrage; Convertible
    Bond Arbitrage; Statistical Arbitrage; Relative Value ...

  • CFA Level 1 Study Guide - Financial Ratios - Dilutive Securities ...

    http://www.investopedia.com/exam-guide/cfa-level-1/financial-ratios/dilutive-securities.asp
    ... 14.36 Cash Flow; 14.37 Bond Value and Price; 14.38 Arbitrage-free Valuation
    Approach; 14.39 Typical Yield Measures; 14.40 Assumptions ...

  • CFA Level 1 Study Guide - Liabilities - Reporting The Retirement ...

    http://www.investopedia.com/exam-guide/cfa-level-1/liabilities/bond-retirement-conversion-reporting.asp
    ... 14.36 Cash Flow; 14.37 Bond Value and Price; 14.38 Arbitrage-free Valuation
    Approach; 14.39 Typical Yield Measures; 14.40 Assumptions ...

  • Series 7 Study Guide - Equities - Shares from Conversion ...

    http://www.investopedia.com/exam-guide/series-7/equities/share-conversion.asp
    ... them to 500,000 common shares (50 shares per bond times 10,000 bonds), each convertible
    at $20 ... Still, it is important to not be too glib about arbitrage. ...

  • CFA Level 1 Study Guide - Financial Ratios - Calculating Basic and ...

    http://www.investopedia.com/exam-guide/cfa-level-1/financial-ratios/basic-diluted-eps.asp
    ... 14.36 Cash Flow; 14.37 Bond Value and Price; 14.38 Arbitrage-free Valuation
    Approach; 14.39 Typical Yield Measures; 14.40 Assumptions ...

  • Massive Hedge Fund Failures

    http://www.investopedia.com/articles/mutualfund/05/HedgeFundFailure.asp
    ... (To learn more, see Convertible Bonds: An ... attracting investors with the promise of
    an arbitrage strategy that ... Key Strategies To Avoid Negative Bond Returns. ...

  • CFA Level 1 Study Guide - Fixed Income Investments - The ...

    http://www.investopedia.com/exam-guide/cfa-level-1/fixed-income-investments/embedded-option-importance.asp
    ... 14.36 Cash Flow; 14.37 Bond Value and Price; 14.38 Arbitrage-free Valuation
    Approach; 14.39 Typical Yield Measures; 14.40 Assumptions ...

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