What is conversion arbitration?

Conversion arbitration is an investment strategy that basically includes three specific actions that are held simultaneously. The design of this type of arbitration is understood as relatively without the risk for the investor, and still has the ability to strengthen the investment position because it concerns the overall stability of the investment portfolio. Sometimes it is referred to as a long option field, conversion arbitration will always include elements that carry the same expiration date and exercise price.

The three transactions that make up conversion arbitration are very simple. The first transaction includes the purchase of an asset. This shares transaction is sometimes referred to as basic acquisition and forms the basis of the process.

It occurs simultaneously with the purchase of the underlying asset is the purchase of an option. This PUT will have the same exercise prices and the same expiration date as the basic asset. It is essential that the price and expiration date are identical to the strategy to work.

The final element in the gear arbitration is the sale of mCalling the call. As well as the underlying assets and the PUT option, the call option must carry the same expiration date and the same price of the exercise. The call option must be available at the same time with the purchase of PUT and the acquisition of the underlying asset.

In some variations of arbitration, the actual purchase of the underlying asset is replaced by purchasing futures on the base asset. However, there is a difference between financial analysts as to whether the use of futures in the structure of the conversion arbitration is more or less useful than shares of shares of the overall strategy.

Generally, the use of transmission arbitration is not intended as a means of huge and rapid return. However, the strategy can generate some rapid profit depending on the current state of the money market. At the same time, if market factors quickly cause Put and calls for some reason to overestimate or underestimated, this may lead to a situation where small ofa track or profit leads in a short -term horizon.