Can anyone help me clarify this?
I've been researching Conv Arb strategies, and th most common strategy I have found was long the bond, short the stock (if you think the bond is underpriced)
I would think you would want to go long on a convertible bond and put option. This way if St > conversion price, then exercise the convertible and see maximum market upside with only the cost of the puts hampering the return.
If the St
Too difficult? Pricey or what?
Thanks
| +29 | Interesting juncture: L/S Hedge Fund or MM Private Credit? | 6 | 3s | |
| +19 | London HFs | 8 | 1d | |
| +19 | MM BD people make LSD/MSD $m?? | 25 | 8h | |
| +16 | Road to Working at a Hedge Fund? | 14 | 1d | |
| +15 | Credit comps | 9 | 1h | |
| +14 | Large HFs in SF / Bay Area | 10 | 2d | |
| +13 | Fund Accountant @ HF | 7 | 4d | |
| +12 | JD or CFA for Distressed Debt/Activism? | 2 | 2d | |
| +10 | Junior Summer: Long Only AM vs High Yield Research at a BB | 3 | 28m | |
| +9 | Hedge fund operations - what does your day to day look like? | 0 | 1h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Is St the stock price or the put strike? Not entirely sure what your question is here.
St is stock price at time of conversion
I'm just trying to understand the logic between long convert bond/short stock vs long convert bond/long put. The latter would have a strike price, k, at the conversion price
This way the premium loss on the long put hampers the upside of the convertible bond but only by the premium loss. If you short a stock and long a CB, then wouldn't the loss on the short negate all the potential upside with exception to the CB interest payments?
Sorry if it doesn't make much sense, I'm just starting out on the convertible bond arbitrage strategy
You're not wrong, but there are a few reasons you might short rather than buy a put:
a) there convexity issues, usually because convertible bonds rarely trade exactly at their parity price b) at-the-money options may be expensive (on an implied volatility basis). c) Duration on puts: your puts eventually expire and you need to buy new ones or unwind your trade
I'm not an arb guy so there may be nuances or other factors I'm missing.
Quas odit ducimus molestiae deleniti omnis laudantium. Et aut aut hic quam fugiat itaque. Optio a rerum eos quam vel hic aliquam. Est excepturi facilis vel officia nam totam et quae. Exercitationem molestias quisquam maxime non ipsum reiciendis doloribus. Quaerat doloremque dolores ipsa minima sed optio aliquid. Repudiandae quibusdam et consectetur et exercitationem enim et.
Commodi numquam voluptatem ipsam. Illo amet natus saepe repellat voluptatem. Consectetur aut rerum omnis sint ipsa. Numquam unde ea blanditiis et et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...