Model cheapness is worthless if you cannot borrow the stock, if a takeover clause orphans your conversion rights, or if a 144A allocation never reaches your book. Convert arb is a market-structure strategy as much as a pricing strategy: who holds the float (outright vs hedge funds), how issuance is rushed under Rule 144A, and what the prospectus actually says. This note closes Convertible Terminology and Payoff on those institutional facts.
Learning objectives. By the end of this note you should be able to:
- list the main dimensions that slice the convertible universe (rating, type, region, maturity, 144A);
- explain why skipping the prospectus for a broker summary is a legal/documentation risk;
- contrast outright (long-only) investors with convertible "arbitrageurs" and what each hedges;
- outline a full risk strip (equity, credit, rates, vol) as the Handbook's worked Intel-style setup.
In this lesson
- The universe
- The prospectus
- Who holds the bonds
- A canonical risk strip
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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