Strategy #0000000051 · Convertible and hybrid securities
Convertible-bond delta arbitrage
Buy the convertible and short delta-adjusted shares; separate credit, rate and option risks.
A convertible combines debt cash flows with an equity conversion option. Relative-value trades often buy the bond and short delta times the conversion ratio in shares, rebalancing as delta changes. Potential return sources include the conversion option, volatility, coupon and relative valuation; credit spreads and convertible liquidity can deteriorate together, so delta neutrality does not prevent large losses.
Delta changes, and an equity hedge does not remove credit, liquidity, rate or contract risks.
Three ways in
Understand the story. Then inspect the risk.
Start with a familiar situation, check the payoff, then test how the numbers change.
The idea · in two minutes
What P&L remains for a long convertible and delta-adjusted stock short under an entered scenario?
Jack buys a convertible at 100 face with stock at 40, conversion ratio 2 and model delta 0.55. Rose calculates the initial short shares, then asks him to enter a stock exit price and bond-return scenario.
The scenario combines convertible return with short-stock P&L, then deducts borrow and trading costs. It is not a convertible valuation model and does not update delta dynamically.
Gaps, borrow recalls, wider credit spreads or conversion clauses can break the hedge. A real portfolio also manages rates, credit, volatility, calls and rebalance costs.
- Convertible return assumptionEnter bond notional/price, conversion ratio, delta, stock path, bond return and costs for a simplified delta-hedged scenario.
- Delta-short stock hedge P&LNo fair-value model, dynamic delta, volatility, credit spread, calls, rates or borrow recalls; static assumptions only.
- Net after borrow and costsIllustrative expiry outcome.
Illustrative research examples only. They are not live signals or a recommendation.
The mechanics · payoff and exposure
N_{short}=N_{CB}\frac{CR\Delta}{P_{CB}},\quad R_{net}=R_{CB}+\frac{N_{short}(S_0-S_1)-Borrow-Cost}{N_{CB}}
N_CB is invested notional, P_CB bond price per unit, CR shares per bond and Δ stock delta. Bond return and stock path are user-entered.
Greeks: the directional intuition
- Delta 漂移
- Measures sensitivity to implied volatility.
- 信用與流動性
- Measures sensitivity to implied volatility.
- 借券與條款
- Measures sensitivity to implied volatility.
N_{short}=N_{CB}\frac{CR\Delta}{P_{CB}},\quad R_{net}=R_{CB}+\frac{N_{short}(S_0-S_1)-Borrow-Cost}{N_{CB}}
Practical context · published observations
Convertible-bond delta arbitrage: read the record with its caveats.
The chart uses the published figures or explicitly labelled study inputs below. A historical index or model replay is not the same as an investor’s realised account return.
不估可轉債 fair value、動態 delta、波動率、信用利差、強贖、利率或借券召回；僅為靜態假設。 Source ↗ · Methodology ↗
Change assumptions and inspect the scenario
Inputs illustrate the strategy mechanics; they are not live quotes, forecasts or investment advice.
Variants · same family, different risk levers
Related strategies can have different exposures and failure modes.
Compare the mechanism and its limits.
| Related strategy | Relationship | What changes | New cost or risk |
|---|---|---|---|
| Convertible OAS | Credit-adjusted spread | Compares valuation with option-adjusted spread. | Model and credit-curve risk. |
| Liquidity provision | Primary issuance | Provides liquidity around new supply and hedge demand. | Inventory can be hard to exit in stress. |
| Credit/term premium | Bond factor | Attributes returns to credit and duration exposure. | Not pure conversion-option arbitrage. |
No fair-value model, dynamic delta, volatility, credit spread, calls, rates or borrow recalls; static assumptions only.
Read beyond the summary
References
Primary sources and research used to describe the strategy and its limits.