Convertible Hedge

AAA

DEFINITION of 'Convertible Hedge'

A trading strategy that consists of a long position in a company's convertible bond or debenture, and a simultaneous short position in the underlying common shares. The convertible hedge strategy is designed to be market neutral, while generating a higher yield than would be obtained by merely holding the convertible bond or debenture alone. A key requirement of this strategy is that the number of shares sold short should equal the number of shares that would be acquired by converting the bond or debenture.

INVESTOPEDIA EXPLAINS 'Convertible Hedge'

The rationale for the convertible hedge strategy is as follows: if the stock trades flat or if little has changed, the investor receives interest from the convertible security plus interest from the short sale proceeds (less any costs to borrow the shorted shares and margin requirements). If the stock trades lower, the short stock position will be profitable, offsetting any decline in the price of the convertible bond or debenture. Conversely, if the stock appreciates, the loss on the short position would be offset by the gain in the convertible security.

RELATED TERMS
  1. Market Neutral

    A strategy undertaken by an investor or an investment manager ...
  2. Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with ...
  3. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  4. Busted Convertible Security

    A convertible security that is trading well below its conversion ...
  5. Conversion Price

    The price per share at which a convertible security, such as ...
  6. Steve Cohen

    A trading magnate also referred to as the Hedge Fund King and ...
Related Articles
  1. Bonds & Fixed Income

    Are High-Yield Bonds Too Risky?

    Despite their reputation, the debt securities known as "junk bonds" may actually reduce risk in your portfolio.
  2. Bonds & Fixed Income

    Leverage Your Returns With A Convertible Hedge

    Find out how you can maintain your income stream by using this type of bond strategy.
  3. Bonds & Fixed Income

    Convertible Bonds: Pros And Cons For Companies And Investors

    Find out why businesses choose this type of financing and what effect this has on investors.
  4. Bonds & Fixed Income

    Convertible Bonds: An Introduction

    Find out about the nuts and bolts, pros and cons of investing in bonds.
  5. Options & Futures

    The Mandatory Convertible: A "Must Have" For Your Portfolio?

    Mandatory convertibles are a little understood security with some distinct advantages. Find out if they are right for you.
  6. Mutual Funds & ETFs

    Can you invest in hedge funds?

    Read about what it takes to invest in a hedge fund, and learn how some investors find ways to indirectly capture a hedge fund's returns.
  7. Options & Futures

    When short selling, how long should you hold on to a short?

    Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a short position.
  8. Mutual Funds & ETFs

    What happens if you don't hedge your investments?

    Learn the purpose, advantages and disadvantages of hedging, and find out how to utilize hedging to enhance an overall investment portfolio.
  9. Mutual Funds & ETFs

    Position Your ETF Portfolio For Success In 2015

    2015 may well usher in a new era in the markets where things like risk management, trend following, and asset allocation are key to a successful outcome.
  10. Investing Basics

    Options give a less risky slice of Alibaba's pie.

    US investors can use options as a way to benefit from the profitability of Chinese-owned Alibaba while minimizing the downside risks.

You May Also Like

Hot Definitions
  1. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  2. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  5. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  6. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
Trading Center