What strategy aims to profit from price discrepancies between a convertible bond and its underlying components?
Understand the Problem
The question is asking about a specific investment strategy that seeks to take advantage of price differences between a convertible bond and the underlying assets or securities that can be converted into. The aim is to identify which of the provided options best describes this strategy.
Answer
Convertable bond arbitrage.
The strategy that aims to profit from price discrepancies between a convertible bond and its underlying components is called 'convertible bond arbitrage'.
Answer for screen readers
The strategy that aims to profit from price discrepancies between a convertible bond and its underlying components is called 'convertible bond arbitrage'.
More Information
Convertible bond arbitrage involves simultaneously taking a long position in a company’s convertible bonds while shorting the underlying stock. This approach seeks to exploit market inefficiencies in the bond-to-stock pricing.
Tips
A common mistake is not understanding the correlation between the bond and the stock, which can lead to incorrect hedging.
Sources
- What Is Arbitrage? 3 Strategies to Know - HBS Online - online.hbs.edu
- Convertible Arbitrage Hedge Funds: Full Guide - mergersandinquisitions.com
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