Convertible bond arbitrage funds will increasingly hedge option implied volatility as the market gets more competitive. Glen Christie, v.p. and senior equity derivatives broker at Cantor Fitzgerald in London, told delegates at Euromoney's equity derivatives summit last week, that this is likely to be a major trend.
Convertible bonds contain an embedded equity call option that is typically issued at below market levels, but as the number of convertible bond buyers increases the price of the options is going up. This means there is less of a cushion and funds will start hedging the risk of vol moving against them, explained Christie. "As the convertible bond market gets more competitive they will be forced to do this more," he said.
