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CMS Energy Corp. Message Board

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  • youandme1998 youandme1998 Dec 1, 2003 1:29 PM Flag

    One question.....What for ?????????

    Just goes to show you. When a company starts to put its house back in order and does the things it NEEDS to do, like take advantage of low interest rates, the market views it negatively.

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    • Are you familiar with the concept of convertible hedging? You need to read up on it, IMO.

      Basically, what it boils down to is they short the common and buy the convert. They use the convert interest and interest on the short proceeds to pay the dividend on the common. If the common goes up, so does the convert, so they make money. If the common stays flat they make money from interest. If the common goes down, they make money from the short.

      So when you look at the screen and wonder why someone has 300,000 shares for sale and keeps moving the price down, now you know why. It will be a month before the hedges have shorted all the shares they need to short, and in the meantime the stock price will go to the dumper.

      • 2 Replies to extremebricknrnortar
      • I always thought a delta hedge was put in place near or above the convert price. In this case, the hedging, if that's what is going on, must be well below the convert. So presumably that leaves a gap between the convert price and the average short where the player loses. In fact, they would lose to some degree any time the price was above the short. Some gap could be explained by excess coupon (if they are receiving more than they would demand for such a covered loan - this is probable if they can get a good hedge in place), but the gap here seems overly broad. Is there some way to avoid that without waiting to hedge at a higher price?

      • WRONG ANALYSIS. If the common goes up, so does the convert - TRUE - but the short cancels any gain by the convert rise so there is no gain to hedgers that way. They only do this ( short the common equivalent to the preferred)to capture the yield and reduce or eliminate any price movement in the instrument.

 
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