Editing Convertible arbitrage (section)

{{Short description|Investment strategy}}
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'''Convertible arbitrage''' is a [[market-neutral]] [[investment strategy]] often employed by [[hedge fund]]s. It involves the simultaneous purchase of [[convertible security|convertible securities]] and the [[short selling|short sale]] of the same issuer's [[common stock]].

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]]. In particular, the equity option [[embedded option|embedded]] in the convertible bond may be a source of cheap [[volatility (finance)|volatility]], which convertible [[arbitrage]]urs can then exploit.

The number of shares sold short usually reflects a [[Greeks (finance)|delta]]-neutral or market-neutral ratio. As a result, under normal market conditions, the arbitrageur expects the combined position to be insensitive to small fluctuations in the price of the underlying stock. However, maintaining a market-neutral position may require rebalancing transactions, a process called dynamic [[delta hedging]]. This rebalancing adds to the return of convertible arbitrage strategies.