About the Convertible Arbitrage Index. Convertible arbitrage is one of the strategies employed by Calamos Market Neutral Income Fund (CMNIX), the largest fund in the Morningstar Market Neutral category (Morningstar data as of 9/30/17). I've always been interested in low risk arbitrage in the stock market, but haven't done much research on the topic. Here’s our explainer on how the strategy works, its benefits and an introduction to…wait for it…convertible arbitrage gamma trading. This involves going long the Convertible Bond and shorting the underlying stock according to the calculated delta-hedge. • If the convertible bond does not sell for the greater of these two values, arbitrage profits could be realized. Dollars) Convertible arbitrage market (millions of U.S. $) % Change in asset flows other arbitrage practices that tend to gain more investor attention during sideways or declining markets. For example, during the corporate-scandal-Convertible Arbitrage: An … A convertible bond is a corporate bond that can, at the option of the holder, be converted into shares of the issuer’s common stock. CONVERTIBLE BONDS AND CONVERTIBLE BOND ARBITRAGE Convertible Bonds. The aim of convertible bond arbitrage is to exploit mispricing in convertible bonds, usually by buying an undervalued convertible bond (Henderson, 2005) and taking a short position in the equity. The convertible arbitrage strategy is pursued mainly by hedge funds and proprietary trading desks at investment banks. Convertible bonds are hybrid securities—essentially a corporate debt obligation that comes packaged with an equity call option. Convertible arbitrage funds build long positions of convertible bonds and then hedge the equity component of the bond by selling the underlying stock or options on that stock. Convertible bond arbitrage is a strategy executed mostly by hedge funds. Equity risk can be hedged by selling the appropriate ratio of stock underlying the convertible option. Many investors may be unfamiliar with this type of bond, but it is quite simple. Convertible arbitrage starts with the purchase of a convertible bond. This strategy is identified by hedge investing in the convertible securities of a company. The premise of the strategy is that the convertible is sometimes priced inefficiently relative to the underlying stock, for reasons that range from illiquidity to market psychology. Luck may have it, Preet Banerjee a Bay Street Trader and blogger from WhereDoesAllMyMoneyGo.com, has written a great article for us describing convertible bond artibtrage. Arbitrageurs attempt to exploit inefficiencies in the pricing of convertible bonds by purchasing the undervalued security … Convertible Arbitrage Market Value (Millions of U.S. Those looking to lower the beta or volatility of a portfolio may use convertible arbitrage alongside alternative strategies. • To estimate the bond investment value, one has to determine the required yield on a non-convertible bond with the same quality rating and similar investment characteristics. ARBIX’s beta to the S&P 500 Index is 0.08 and beta to the Barclays Aggregate Bond Index is 0.21 and standard deviation is 2.33% (since its conversion from a … A typical investment is to be long the convertible bond and short the common stock of the same company. Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds.It involves the simultaneous purchase of convertible securities and the short sale of the same issuer's common stock.. 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