Monday, December 18, 2006


Today's WSJ carried a good article on Ford's new debt raising..and discusses convert-arb strategy.

One reason for the recent drop in the share price is Ford's issuance earlier this month of $4.5 billion in unsecured bonds that can be converted into its shares, part of the $23 billion in debt issued. The offering was snapped up mainly by "convertible-arbitrage" investors who sold Ford shares to hedge their exposure to movements in the stock price, according to people familiar with the deal.

Convertible-arbitrage allows investors to profit from movements of convertible bonds against other securities. It often involves trades using credit-default swaps, which are derivative contracts that protect buyers in the case of a bond default. Investors also can hedge against a decline in the price of a convertible's underlying shares, as in the latest Ford case, by selling shares in the open market. The more movement there is in the issuer's securities, the more opportunity to trade.


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