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Finance Concepts Explained
Capital Markets & Investments at Columbia Business School | Simon Oh

Convertible Arbitrage

Betting on volatility by delta-hedging a convertible bond

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The Convertible Bond

  • A convertible bond pays you back either (1) $1,000 in cash, or (2) 20 shares of the company's stock—your choice at maturity.
  • At low stock prices, you take the cash. At high stock prices, you take the stock.
  • The bond is a hybrid: part bond, part stock option.
Convertible Bond Value at Maturity
$2000$1000$0$0$25$50$75$100Stock PriceBond FloorStock ValueBond-likeStock-likeAt-the-moneyConvertible Value
At maturity, the convertible pays the greater of $1,000 cash or 20 shares of stock. Below $50/share (20 × $50 = $1,000), you take the cash. Above $50, you take the stock.
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