Before diving into this hedge fund strategy, let us remind ourselves of the basics: when interest rates fall, bond prices rise. The opposite is true when interest rates rise.
To understand this strategy, we assume that bond portfolio managers are skilled in:
Anticipating the future direction of interest rates.
Pricing credit risk of the bond. ‘Credit Risk’ is the risk that the bond issuer (the borrower) will fail to make interest payments or principal repayment. It is typically calculated as the difference in yield-to-maturity (YTM) of a ‘risky bond’ and the YTM of a risk-free comparable government bond.
This strategy relies on the premise that the credit risk of a bond is priced inefficiently – allowing the bond manager to exploit these inefficiencies and thus make an abnormal return.
In this strategy, the arbitrageur (bond manager) uses two instruments:
A company’s bond (let’s call it the ‘risky bond’)
A government bond with the same term-to-maturity
When the bond manager feels the credit risk is priced higher than it’s supposed to be they would:
Sell short the government bond
Purchase the risky bond
Over time, the credit risk of the ‘risky’ bond eventually comes down to its correct pricing – increasing the value of the risky bond. As the arbitrageur is long the ‘risky bond’, they make a capital gain.
The inverse is done, when the credit spread is narrower than what it’s supposed to be. In this scenario, the arbitrageur:
Purchases the government bond
Sells short the risky bond.
When the credit risk of the ‘risky’ bond, eventually increases to its correct price- the value of the bond decreases. The arbitrageur then can exit by closing their short position. Hence making a capital gain.
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Convertible Arbitrage is a strategy that hedge funds use to make consistent returns while experiencing minimal volatility regardless of market direction.
On a basic level, this strategy involves selling short an overpriced stock and using the proceeds to buy the same issuer’s underpriced convertible bond. To keep things simple, let us assume the number of stocks that are sold short and the number of stocks the convertible bond can be converted to is the same. By doing this, we are hedging ourselves completely against equity risk.
So if equity prices rise in a falling interest rate environment, we make a loss on our short position (stock) which is offset by a gain on our long position (convertible bond). Vice versa, when equity prices fall in a rising interest rate environment, we make a loss on our long position (convertible bond) which is offset by a gain we make on our short position (stock). All the while, we are earning interest payments from the bond, and interest from investing any extra proceeds from the initial short sale.
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In this episode of the Urban Pandit Podcast, I interviewed Chris Hamilton aka ILL Tone, an ace lyricist and Vancouver’s underground Hip Hop veteran. We dive deep into his rap beginnings, the current status of Vancouver’s hip hop scene, his experience with substance use and addiction (and more.)
Niel Scobie is a PhD Candidate and part-time instructor in Media Studies as well as a sessional instructor at the University of Guelph’s School of Fine Art and Music. He holds an MA from Carleton University in Music and Culture and a BA (Honours) from Vancouver Island University in Digital Media Studies.
Niel Scobie started Vancouver’s first all-rap radio show “In Effect” in 1989 at CITR 101.9 fm at UBC.
In this episode we dive deep into Vancouver’s Hip Hop origins, factors that influenced the Canadian west coast hip hop scene, Toronto vs. Vancouver hip hop history and etc.
Let me introduce myself. I am God. Yes, a God, whom all you humans revere and worship fanatically. You have given me so many names, but I prefer to be known by my birth name Sanjay. Pretty regular huh? That’s because I was born a human.
Let me tell you something about Gods. First of all there are 75 of us currently. We were all born human, and have moved a long way from the archaic rituals and practices you follow. Every human has the potential to become a God but they have to go through an ideological rite of passage. An application of sorts. Our job is pretty much administration. We audit every human’s life experience to weigh Good against Bad and accordingly assign a karmic retribution. We also govern the organizational structure of the human realm, and meet annually to see what changes we can make. Let me give you a relevant example: When we saw the human population rise beyond necessity, we initiated a worldwide pandemic.
So in short think of me like a Director of a company, but only it’s not a company – it’s the world. We had some of our tenured Gods retire and are opening up opportunities to train more humans to become Gods. As a result, I was asked to share my story on how I attained my Godship.
I will start by saying this, we ARE different from you. Don’t be fooled by my candidness. We don’t see the world the same way as you do. That’s why only a select few human beings can qualify for Godship.
The way we see the world is very pessimistic. To become us, you have to ingrain our code of conduct:
There is nothing such as “fulfillment” or “content”. What you have, another craves. There is no concept of Human Potential. What you are, another strives for. There is no “good” and there’s no “bad”. If being a millionaire is good for you, others see it from envious lens. There is no life and there is no death. There is no afterlife as well, there is only karmic rewards and punishments. Understand that the world is a two-dimensional structure only governed by ‘right’ and ‘wrong’. And ‘right’ and ‘wrong’ does not equate to ‘good’ and ‘bad’. Shoplifting a loaf of bread worth $2 might be a ‘bad’ thing in the eyes of Human Justice but it is justifiable from the Eyes of God. Understand this and you will be worthy of our way of life.
You see, since I was a human child, I always lived on the fringe of society. I was never preferred within my family nor in my peer groups. I wasn’t bullied but I wasn’t acknowledged as well. I was definitely hurt in the beginning but through the years I could understand why. Humans lived in a realm where they strive to achieve an ideal. An ideal in terms of beauty, culture, morality, sociability, wealth, health and psychology. An ideal that is not reflective of the direction society takes itself. Upon discovering this in my late 20’s, I made it my crusade to teach my peers what the truth is.
I initially started hosting sessions in my basement where I and a group of my students (who were the same age as me) would talk endlessly to uncover the depths of our psychology. We spoke about everything : childhood trauma, first experiences of intimacy, insecurities, passions etc. After years and years of just collective introspection, we reached a weird conclusion. We started viewing our own experiences from the vantage point of a third person. The third person that does not care one bit of what we went through. Once we started doing this, we realized that traumas, inflicted pain, hurt and disturbances did not hold much weight anymore. We realized that “pain” is a tool used to punish and “love” is a tool used to reward. Much of society is governed by pain and by love. We crave for love and try to avoid pain.
But after all pain and love are both constructs of nature, aren’t they? As humans we questioned why would God cause us pain, if he had the power to provide us with endless love. So we took a different turn, we tried to discover pain a little bit more. We approached pain with no sense of good and bad. We first started to physically throw punches at each other. Then it escalated to hitting each other in the shin with a baseball bat once a week. We kept doing this until our nerves grew numb. But the truth is that there is no pain greater than emotional pain.
We came to the concluding that emotional pain is a matter of trust being broken. That’s when we started to betray our loved one’s trust. It started with one of my students, Vikas being promiscuous in his marriage and breaking his wife’s trust in him. Then another student, D’Angelo, borrowed $100,000 from his father to “start his own business”, which he took to the casino to gamble it all off. Another person, Jishnu pawned his wife’s jewelry to treat himself with a watch.
Over the years, as we kept doing this with our near and dear ones, we had nobody with us anymore. Only each other. And the only thing left was to betray each other.
The ultimate punishment was “Isolation”. I, being the first person to realize this, achieved this level by poisoning each one of my students in their sleep. I had to face 15 years of jail time (to satisfy humans) but it did not bother me one bit. I was as isolated in jail as I was in society.
And then it was only me. No one knew me or cared about me. I did not know anyone nor did I care for them either. When I saw pain being inflicted on someone, it did not bother me anymore. When someone tried to love me, I did not feel good anymore.
Without the sense of “good” and “bad”, I had achieved tabula rasa. That was when I was recruited. The day I was released from prison, a stranger had come to receive me. He was bald and stocky man with a French beard. He did not look anything like a God. In fact he looked the opposite. He had freckles all over his face and had a dead eye. Anyways, he received me and said he will drive me to where I belong. Once I entered his car, I had lost the sense of time. He kept driving on for hours. Soon hours turned to days, and days turned to months. We never stopped once for food and drink. And he never spoke a word either. After 5 years, 2 months and 5 days of travelling we reached our destination.
He guided me into a nearby house where he showed me a book. A book that consisted of what is right and what is wrong. A book to teach me the philosophy of Gods. A book he had written himself. After a successful interview I was recruited. The only question he asked was, “Who do you selflessly and truly love?” . And my answer was nobody. He replied , “That’s rights. Gods love nobody.”
– Siddharth Bala
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Just the beginning of my new journey writing short stories.
Her phone kept ringing relentlessly. She only got four hours of sleep, after a long night of drinking with her friends. Nevertheless she struggled to find out who this selfish caller was. Squintingly, she saw Mom, Sis. “Aw shit, not again !” she thought to herself. She had been avoiding them for two weeks and now it seemed like they had unwillingly developed a dialling addiction.
She regretfully picked up the phone and mustered a broken and gruff, “Hhe-llo”. It seemed like the call had already begun, and everyone was in the middle of a heated conversation. Her mother was aggressively narrating how her grandmother was being completely selfish and stubborn.
She knew exactly how these calls went. Since she was 24, she had been perfecting her routine: Keep quiet, listen, keep quiet, listen. That was precisely what she was planning to do. She knew at some point, blame would shift towards her, and her mother would say, “this girl is utterly useless ! No matter how many times I tell her about the opportunity, she is stubborn and selfish. All my attempts are futile. Even she wants to go her own way.” All she could do at that point was to keep quiet and listen. She had learnt the hard way that sticking up for herself would not yield any good. In turn if she managed to shield herself in anyway, her mother would retaliate by throwing jabs at her insecurities with more fervour.
Eventually, her foresight would prove her right. Her mother indeed brought up her missed opportunity and made her the target of her vicious attack.
Her autistic twin sister, Ally was on the same call as well. She was the only person who could remotely understand her. She used to hate the fact that her character was assassinated in front of Ally. However with time she grew numb to it. They had an absent father growing up, and she took it upon himself to bring her sister up. She always expected Ally to miraculously support her during these infamous calls, but all she could be was a mere spectator. As she listened to the ghastly charges and accusations made against her, she contemplated for one last time, “Did I really have a choice and was it really an opportunity?”