investors to invest in the debt stock of the firm and hence offer lucrative rates. In some instances, it may go awry if the convertible security declines in price but the underlying stock rises. If the convertible possesses the future of coming back to normal returns, then this will be an appropriate opportunity for the manager to cash. Since one generally must hold the convertible bonds for a specified amount of time before conversion into equity stock, it is critical for the arbitrageur/fund manager to evaluate the market carefully and determine in advance if market conditions or any other macroeconomic factors can have.
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If the stock gains, the loss on the short stock position would be capped, because it would be offset by the gain on the convertible. This ratio compares the value of ninjatrader 8 automated trading strategies the position held through the use of the hedge in comparison to the entire position itself. The managers ability to enter/exit a position with minimal market impact will have a direct impact on the profitability. One also needs to be aware of the legal implications and volatility applicable in the stock markets as well as the bond markets. Interest Rate Risk: Convertible bonds with longer maturity are sensitive to interest rates and while stocks with a short position are a definite hedging strategy, lower hedge ratios may require additional protection. Convertible Arbitrage Example Lets take a practical example of how a convertible arbitrage will work: The initial price of a convertible bond is 108. Convertible, arbitrage, a convertible arbitrage is a long-short trading strategy favored by hedge funds and large-scale traders. Arbitrageurs will thus need to employ currency futures or forward contracts to hedge such risks.
Convertible arbitrage trading strategy pdf