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Finance Dictionary and Glossary of Investment Terms
Convertible arbitrage
Definition 1.
A practice, usually of buying a convertible bond and shorting a percentage of the equivalent underlying common shares, to create a positive cash flow position (with expected returns above the riskless rate) in a static environment and benifit from capital appreciation should the convertible's premium. This form of investing is far from riskless and requires constant monitoring. See: Chinese hedge and set-up.
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Definition 2.
An investing strategy that involves the long position on a convertible security and a short position in its converting common stock.
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Definition 3.
A strategy involving the purchase of convertible securities and the subsequent shorting of the corresponding stock. Conversion will offset the short position. The transaction may be profitable if the convertible is priced incorrectly relative to the stock.
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