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Related Flashcards
Cards In This Set
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Anticipated volatility
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The future level of volatility expected by a market participant.
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Asset-backed securities
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Still another subset of fixed-income arbitrage trades is ____________, which are securitized products created from pools of underlying loans or other assets.
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Busted convertibles
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Bonds with very high conversion premiums are often called ___________________, as the embedded stock options are far out-of-the-money.
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Carry trades
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Attempt to earn profits from carrying or maintaining long positions in higher-yielding assets and short positions in lower-yielding assets without suffering from adverse price movements.
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Classic convertible bond arbitrage trade
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To purchase a convertible bond that is believed to be undervalued and to hedge its risk using a short position in the underlying equity.
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Classic dispersion trade
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A market-neutral short correlation trade, popular among volatility arbitrage practitioners, that typically takes long positions in options listed on the equities of single companies and short positions in a related index option.
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Classic relative value strategy trade
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Based on the premise that a particular relationship or spread between two prices or rates has reached an abnormal level and will therefore tend to return to its normal level.
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Complexity premium
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A higher expected return offered by a security to an investor to compensate for analyzing and managing a position that requires added time and expertise.
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Components of convertible arbitrage returns
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Include interest, dividends, rebates, and capital gains and losses.
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Convergence
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The return of prices or rates to relative values that are deemed normal.
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Convertible bonds
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Hybrid corporate securities, mixing fixed-income and equity characteristics into one security.
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Correlation risk
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Dispersion in economic outcomes attributable to changes in realized or anticipated levels of correlation between market prices or rates.
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Correlations go to one
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During periods of enormous stress, stocks and bonds with credit risk decline simultaneously and with somewhat similar magnitudes
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Delta
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The change in the value of an option (or a security with an implicit option) with respect to a change in the value of the underlying asset (i.e., it measures the sensitivity of the option price to small changes in the price of its underlying asset).
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Delta-neutral
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A position in which the valueweighted sum of all deltas of all positions equals zero.
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