A convert can remain cheap to the model and still force the desk to exit. The short-stock leg may become hard to borrow or be recalled; the issuer may call the bond, announce a merger, alter the conversion terms, or require a time-critical election; and a settlement or processing failure can leave the intended package only partly hedged. These are not clerical exceptions. They set the effective holding period and can turn a carefully constructed relative-value trade into a directional or funding exposure.
the Programme profile places these risks in Stage 4 because they sit at the junction of security terms, hedge implementation, and book controls. This note converts the Handbook operational/documentation categories and Calamos's call-protection discussion into a daily desk checklist. It complements—not replaces—the contract reading in The Convertible Market, Prospectus and Participants.
Learning objectives. By the end of this note you should be able to:
- distinguish a hard-to-borrow cost from a recall and from a failed locate;
- trace how an issuer call can truncate the value and hedge horizon of a cheap convert;
- classify corporate actions by whether they change payoff, hedge, settlement, or financing;
- construct an operational control sheet for a live long-convert / short-stock package;
- choose a response when a still-cheap bond must be unwound.
In this lesson
- Borrow is a live hedge input
- Calls change the trade horizon
- Corporate actions are four different questions
- A daily control sheet
- Control hierarchy
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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