Why convertible bond arbitrage strategy generate profits

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Convertible Bond Arbitrage desk managers closely monitor their book delta exposure and dynamically hedge the risk by shorting the related stocks.

(1) What is the major reason why the Convertible Bond Arbitrage strategy generate profits (i.e. what is the main source of alpha)?

(2) Explain two scenarios when this strategy loses money.

(3) After Tesla stock price tripled in January 2020, Financial Times (8 Feb 2020) news article said "The price was pushed up partly by convertible bonds arbitrage investors who covered their short positions along with stock price spike." Write down whether you agree or not and why?

Reference no: EM133114467

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