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Non-Tech : Simula (SMU) -- Ignore unavailable to you. Want to Upgrade?

To: TEColeman who wrote (981)	3/11/1998 10:05:00 AM
From: greentree	Read Replies (1) \| Respond to of 1671

Owners of the debentures are usually (by corporate charter) unable ot own common stock. Therefore, when they buy a convert., they will sell short against the box for the shares their debenture will convert into. This strategy allows them to "lock in" a return (usually about 20%) and stay away from owning the common. A decent guess is that 20-33% of the short interest in SMU is real.

To: TEColeman who wrote (981)	3/11/1998 10:23:00 AM
From: Noblesse Oblige	Read Replies (1) \| Respond to of 1671

Hi TE, "Long" means to own something, TE. "Short" means to have sold something that you do not own with the attempt to buy it back at a lower price. The "long" convertible debentures, "short" common stock trade is well known in arbitrage circles. When you are "long" the converts, you receive income from the interest payments, When you are "short" the stock, you receive income from the interest credit that you have provided the broker by effecting a sale that puts cash on the broker's balance sheet. Thus, you collect interest on both sides of the trade. If the stock rises, both the "long" and the "short" go up in price, so you are hedged. If the stock falls, the short (common stock) declines by a greater degree than the "long" (the debentures), thus greatly increasing your profit. It is essentially a carry trade, where you make money on the interest differential, which in this case is very high because Simula common shares pay no dividend whatsoever. And, if you are very lucky (while in this trade), the stock declines and you make extra capital beyond the interest/dividend spread. I hope this is helpful.