Convertible bond arbitrage looks set to revive as volatility creates opportunities

In an uncertain world, convertible bond arbitrage has much to offer in downside protection and potential upside. Greater volatility increases the opportunity set for this strategy to create value.

Having fallen dramatically from grace in 2008, convertible bond arbitrage looks primed to make a comeback as securities cheapen and a change in the investor structure of the asset class creates more dislocations in prices.

Convertible bonds can be converted into equity at a pre-determined date and price that usually constitutes a discount to the market value. When a convertible bond is deep in-the-money (the underlying equity is trading well above the conversion rate), convertibles tend to