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----- Original Message -----
From: pbf <pbf@xxxxxxxxxx>
To: Sidney V. Gold <sgold@xxxxxxxxxxx>
Sent: Sunday, May 09, 1999 8:49 PM
Subject: Re: Hedging with convertible bonds?
> Sidney, thanks for your insight. You raised several questions in my
> mind, and I hope you may be able to answer some (all?) of them. I'll
> relate them to your numbered points:
>
> 1. "interest rebate on short sales"? Are you referring to the fact that
> there shouldn't be extra margin required for the short sales, since
> they're covered by the bonds?
When you have a short position in stock you should recieve 80% of brokers
call or 90 day t bills as income
for the short fund balance in your account.
When you sell a stock short your brokerage firm borrows the stock from an
institutional holder or from a margin account and pays a fee to the lender
of the stock , then invests the proceeds of the short sale earning at least
the t bill rate.
> 2. No question here -- this is a requirement
>
> 3. Again, this is a requirement -- but thanks for emphasizing it so
> strongly.
>
> 4. Any pointers to books that would help me? My material is from the
> '80s, so things may have changed some! sorry but my feeling is that the
professional traders mostly keep to them selves
the techniques which make them money as to publish them is to create
competation and narrow spreads.
>
> Again, thanks for responding to my question.
>
> -Phil in KC
>
> Sidney V. Gold wrote:
> >
> > In one of my past lives we ran one of the largest Convertible bond and
> > Convertible Preferred books around the street.
> > 1. This will work if you can get the interest rebate on short sales
> > 2. if the market breaks sharply and the convert changes its relationship
to
> > the stock ( the common stock should be a low or non
> > dividend payer)
> > 3. You HAVE to do your homework check the callable dates of the Convert
if
> > called all premiums down to the dividend differential vanish.
> > 4. there is a lot more and you should realize that you will be in
> > competition with all of the large wall street firms.
> > Oh yes Rus is correct on the optionablility of the conversion factor
with
> > the main exception that there is no theta, or sigma
> > that acts like those on options.
>
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