Editing Convertible arbitrage (section)

==Risks==
As with most successful [[arbitrage]] strategies, convertible arbitrage has attracted a large number of market participants, creating intense competition and reducing the effectiveness of the strategy. For example, many convertible arbitrageurs suffered losses in early 2005 when the credit of [[General Motors Corporation|General Motors]] was downgraded at the same time [[Kirk Kerkorian]] was making an offer for GM's stock. Since most arbitrageurs were long GM debt and short the equity, they were hurt on both sides. Going back a lot further, many such "arbs" sustained big losses in the so-called [[Black Monday (1987)|"crash of '87"]]. In theory, when a stock declines, the associated convertible bond will decline less, because it is protected by its value as a fixed-income instrument: it pays interest periodically. In the [[Black Monday (1987)|1987 stock market crash]], however, many convertible bonds declined more than the stocks into which they were convertible, apparently for liquidity reasons, with the market for the stocks being much more liquid than the relatively small market for the bonds. Arbitrageurs who relied on the traditional relationship between stock and bond gained less from their short stock positions than they lost on their long bond positions.