What are the potential benefits of a convertible arbitrage strategy?
A. Convertible arbitrage can generate income through a number of sources, including coupon income from the convertible. The short interest credit is another source of income. Short interest refers to interest the short seller earns by reinvesting the proceeds of the short sale. The short interest credit is this interest, less the borrowing costs associated with the original borrowing transaction and any dividends on the borrowed stock. (The original lender is entitled to the dividends earned on the stock loaned to the short seller.) Convertible arbitrage strategies can also be used to help mitigate the potential impact of equity market volatility. Consider a hypothetical scenario wherein a convertible bond declines in value. Typically, the underlying common stock would also decline. This would benefit an investor who had shorted the stock, offsetting the decline in the convertible. Conversely, if the market price of the common stock increases, the value of the convertible should also i