What is a Convertible Hedge?
Convertible hedges are one type of arbitrage strategy that can be implemented by purchasing a convertible security issued by a given company, while at the same time short selling shares of that same corporation’s common stock. The idea behind a convertible hedge is to take advantage of what is presumed to be an upcoming period of flat performance for the common stock. Assuming the price of the stock does remain at the same level for an extended period of time, the investor will tend to benefit from the hedge. One key aspect of successfully completing a convertible hedge is placing the proceeds from the sale of the common stock into some sort of interest bearing account. This allows the proceeds to continue to generate some sort of return, although the return is usually quite modest. However, this represents a wiser use of resources than holding on to stock that is projected to remain flat for the foreseeable future. As a precaution, the acquisition of the convertible security issued by
