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Convergence trade
       
 
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Convergence trade

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Convergence trade
Trading strategy where similar securities are bought and sold simultaneously in the expectation that prices Will converge in an orderly fashion.
1.A way of taking advantage of mispriced options by creating a synthetic Short futures Position and Hedging Market risk by buying a Futures Contract against it. Thus if a put is undervalued, a trader buys it, at the same time selling a fairly valued call and buying a Futures Contract. The same strategy can be applied if the call is mispriced. If the Option is truly undervalued, the trader earns a riskless profit. The whole Exercise relies on Put-call parity
2.The act of converting a convertible Bond into Equity.

See also Box, Reversal
Posted by  Privatebanking.com
 
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