What is convertible arbitrage?

Convertible arbitrage is a trading strategy where you buy a convertible security and sell (or short) the underlying security. The aim of the strategy is to profit from the price difference between the convertible and common securities.

Where have you heard about convertible arbitrage?

Convertible arbitrage has long been popular with hedge funds and people trading on a large scale. If you haven't heard of it, that's because it's an increasingly rare strategy, thanks to computer programmes that sniff out arbitrage opportunities before traders get the chance to exploit them.

What you need to know about convertible arbitrage...

The strategy uses a long-short position to make the most of possible gains, without being too high-risk. Generally, whichever way the value of the security goes, either the long or the short position will benefit. And because you're trading in convertible and common securities, they're relatively low-risk, too.

However, like anything in the financial world, there are still risks involved. Convertible arbitrage is a tricky strategy. It involves good timing and an understanding of future market conditions that could impact the trade. Unpredictable things like credit and interest rate risks can put any potential profit in jeopardy.

Find out more about convertible arbitrage...

Read our guides to arbitrage and convertible securities to learn about the terms behind this trading strategy.