12.1
Convertible Arbitrage
PYTHON PLUGIN
Convertibles
Arbitrage
Description
Strategy 12.1: Buy undervalued convertible bond, delta-hedge by shorting underlying stock
Strategy Logic
Strategy 12.1: Convertible Arbitrage.
Buy a convertible bond (CB) and short h units of the underlying stock,
where:
h = Delta * C
Delta = dV/dS (derivative of CB value w.r.t. stock price)
C = conversion ratio (shares per bond)
The CB is undervalued when its market price is below the theoretical
fair value computed from the bond floor + embedded call option.
Signal: BUY when the convertible is undervalued vs theoretical fair
value (market price below model value by a threshold). The hedge
ratio is updated daily.
Typical holding period: 6-12 months from issuance.
Required columns: cb_price (convertible bond price),
cb_fair_value (model price),
cb_delta (option delta of conversion feature),
conversion_ratio, close (underlying stock price)
Parameters
| Parameter | Default Value | Type |
|---|---|---|
| undervalue_pct | 0.02 | float |
| exit_overvalue_pct | 0.005 | float |
| min_delta | 0.2 | float |
| max_delta | 0.8 | float |
Risk Configuration
| Risk Parameter | Value |
|---|---|
| Max Position Pct | 6.0% |
| Stop Loss Pct | 5.0% |
| Take Profit Pct | 10.0% |
| Max Drawdown Pct | 15.0% |