the pany. The investor therefore takes advantage of the e from the bond and the sale of
the stock while protecting him from movements in the market.
By hedging the stock exposure through the short sale of the underlying, the investor creates a
volatility movement that can be arbitraged by the option extracted from the original security. This
volatility arbitrage principle, which involves stripping the bond part of a convertible loan to extract the
conversion rights, appeared around fifteen years ago. By stripping the product, the investor extracts the
implicit volatility while hedging against the bond sensitivity by selling futures contracts and stock
sensitivity by selling the underlying. That makes the convertible bond an ideal asset for carrying out
arbitrage on volatility movements.
Fixed e arbitrage
The fixed e Arbitrage strategies involve taking advantage of pricing anomalies between two
or more sectors in the fixed-e market, or between different securities in the same sector. These
anomalies result more often than not from imbalances between the supply and demand and poor
dissemination of relevant information. The classic strategy is to take a long position in the undervalued
sector or asset, and simultaneously a short position in the overvalued sector or asset. The two positions
are generally rebalanced in such a way as to maintain neutrality with regard to the fixed e market
risk or the duration (., interest rate risk). Although the explicit goal of the strategy is to neutralize the
duration risk, it actually seeks exposure to other bond-specific risks to generate performance (., credit,
volatility, liquidity, etc.) There are numerous varieties of interest rate arbitrage strategies: TED
(Treasury securities and Eurodollar futures) spreads, swap spreads, basis trades, credit spreads, option
relationships, yield curve strategies, cross-market trades, etc.
The investment process logically takes place in three stages: checking the in
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