Convertible Arbitrage

Convertible arbitrage is a trading strategy that involves taking a long position in a company’s convertible bonds and simultaneously shorting its common stock. The strategy aims to exploit pricing inefficiencies between the convertible bond, which can be converted into equity, and the stock itself. Convertible arbitrage seeks to profit from changes in the bond's value and the stock's volatility while hedging exposure to market risk through the short stock position.

Example

An investor buys a convertible bond issued by a company and shorts the company’s stock, betting that the bond’s value will increase more than the stock declines or vice versa, capitalizing on pricing inefficiencies.