Convertible Securities Hedging

Convertible hedging remains one of the principal investment strategies in alternative investments. Practitioners as well as academics have discussed the pricing and mechanics of convertible hedging on both non–directional and directional bases. Convertible hedging is an investment discipline that seeks to profit from the movements in price of a given convertible security and, typically, the underlying common stock into which the convertible security would be convertible. In its simplest form, a convertible hedge position is established with the purchase of a convertible security and the short sale of a certain number of common shares. In this article, a case study is presented of how a portfolio manager may establish and manage a convertible hedge position.