The premise of the strategy is that the convertible is sometimes priced inefficiently relative to the underlying stock, for reasons that range from illiquidity to market psychology. market-neutral funds may use leverage to enhance returns (although most market-neutral mutual funds do not use leverage). In some instances, it can go awry if the convertible security declines in price but the underlying stock rises, creating a loss in the short stock position. Convertible arbitrage is a trading strategy that consists of shorting overpriced warrants while buying the underlying stock. We hope you enjoy your experience. Capital Structure Arbitrage. The arbitrageur would receive $10.10 for each share sold short and would be able to cover the short position right away by converting the convertible security into 10 shares at $10 each. Chapter 4: Convertible Arbitrage. During the waiting period, the investor would be at risk. The reason for the lower yield is that the investor has the option to either hold the bond until maturity or convert it into stock when the company's stock price rises to a pre-specified level. In the event that the price of the stock falls in value, the arbitrageur will profit from its short position. Calamos Market Neutral Income’s experienced management team and proven convertible arbitrage expertise overcome concerns about its fast-growing asset base. An investment strategy or portfolio is considered market-neutral if it seeks to avoid some form of market risk entirely, typically by hedging.To evaluate market-neutrality requires specifying the risk to avoid. Chapter 4: Convertible Bond Hedging (Jane Buchan). Linear Analysis of Returns. Thank you! Focusing on the Underlying Strategies. Convertible Bond Arbitrage involves taking a long position in a convertible bond and a short position in the underlying common stock. Risks to a Convertible Arbitrage Strategy. There are three basic types of market-neutral funds: equity market-neutral, merger arbitrage, and convertible arbitrage. Convertible arbitrage is the 2nd most consistent category (after equity market neutral). The deciding factor for the success of such a strategy is the manager risk rather than directional equity or bond market risk. It involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock. For example, convertible arbitrage attempts to fully hedge fluctuations in the price of the underlying common stock. Of course, a short position can go wrong when the stock being shorted increases in price well beyond the initial selling price. Chapter 4: Convertible Arbitrage. A convertible arbitrage strategy is not bullet-proof. The bond might have a waiting period before investors are allowed to convert it to stock. The Fund’s objective is to generate market-neutral returns by dynamically allocating capital across Convertible Arbitrage, Credit Arbitrage and Volatility Arbitrage. An investment strategy or portfolio is considered market-neutral if it seeks to avoid some form of market risk entirely, typically by hedging. When investors short a stock, they typically believe the stock is overvalued, or the price has been run up too far. This position must be adjusted continuously as the delta changes following changes in the price of the underlying shares. 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. 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. Transparency. The premise of the strategy is that the convertible is sometimes priced inefficiently relative to the underlying stock, for reasons that range from illiquidity to market psychology. An investment strategy or portfolio is considered market-neutral if it seeks to avoid some form of market risk entirely, typically by hedging.To evaluate market-neutrality requires specifying the risk to avoid. Equity Market-Neutral and Statistical Arbitrage. Convertible bonds are sometimes priced inefficiently relative to the price of the underlying stock. Statistical arbitrage has come into existence for decades but is no longer as popular as when it was first introduced. Relative Value Arbitrage. An investment strategy or portfolio is considered market-neutral if it seeks to avoid some form of market risk entirely, typically by hedging.To evaluate market-neutrality requires specifying the risk to avoid. Fixed Income arbitrage. Instead, we find that convertibles have relatively large positive gammas. 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