Convertible Bond Arbitrage

This problem tests your understanding of a classic hedge fund trading strategy that combines credit, equity, and hedging logic. You need to know why an investor would own the convertible security while simultaneously shorting the company’s shares, how the two positions are meant to offset some market moves, and what risk the trader is still trying to isolate. Interviewers ask this because it checks whether you can think about convertible securities as both debt and equity, explain the rationale for hedged positioning, and discuss how arbitrage strategies try to profit from pricing inefficiencies rather than from a simple directional bet.