请问如果stock price下跌，比如跌到了$20，那就不会把手上的bond convert 成stock了对吗？如果是这样的话，Profit/ loss就不是5块了。
以下是经典题题目
Johnson research a convertible arbitrage strategy and analyzes transactions involving ABC company stocks and convertible bonds. And collect selected data for ABC company, as shown in Exhibit 1
Exhibit 1
Based on comparisons with industry ratios, Johnson believes that the relative value of ABC's stock is overvalued, while convertible bonds are undervalued. And believe the potential profit outcomes of a long position in the convertible bond combined with a short stock position,assuming that the stock price changes very little, ignoring dividends and borrowing costs. He came to the following conclusions:
"Regardless of whether ABC's share price is falling or rising, the profit of a convertible arbitrage transaction is the same."
Johnson’s conclusion about the profitability of the ABC convertible arbitrage trade is:
选项：
A.
Correct
B.
incorrect, because the profit will be higher if the share price decreases
C.
incorrect, because if the stock price rises, the profit will be higher
解释：
A is correct. The classic convertible bond arbitrage strategy is to buy the relatively undervalued convertible bond and take a short position in the relatively overvalued underlying stock. If the convertible bond’s current price is near the conversion value, then the combination of a long convertible and short equity delta exposure will create a situation where for small changes in the share price and ignoring dividends and borrowing costs, the profit/loss will be the same. The current conversion price of the ABC convertible bond is € 1000×(120/100)/50=€24, and the current AVC share price is €29. Thus, by purchasing the convertible bond, selling short the shares, exercising the conversion option, and selling the shares at the current market price, a profit of €5 can be locked in regardless of changes in the share price. The following table demonstrates this result by showing the same trade profit of €5 for three different stock prices:
where
Long stock via convertible bond profit = New share price – Current conversion price
Short stock profit = Current share price – New share price
Total profit = Long stock via convertible bond profit + Short stock profit
Thus, regardless of the share price, the total profit on the convertible arbitrage trade is €5
B is incorrect because if the convertible bond’s current price is near the conversion value, then the combination of a long convertible and short equity delta exposure will create a situation where the profit/loss will be the same (not higher if the share price decreases).
C is incorrect because if the convertible bond’s current price is near the conversion value, then the combination of a long convertible and short equity delta exposure will create a situation where for small changes in equity price, the profit/loss will be the same (not higher if the share price increases).
