To: Curlton Latts who wrote (18657 ) 7/22/1998 11:30:00 PM From: Zeev Hed Read Replies (2) | Respond to
Curly, let me try and explain the simplest case. Let say a company shares is at $50/share and they issue a $500 MM convertible bond yielding 5% interest and convertible at $50/share. This upon conversion will mean 10 MM new shares. Clear up to know? Well, the buyers put $500 MM and bought this issue, as soon as he has the bond, he deposit this bond with a broker, and every time the stock goes above $50/share he short stock, until he has shorted 10 MM shares. When he shorts, he does not have to put up like you and I 50% cash against the short, he actually get the whole sales price in cash. This because his broker has a collateral, the promise of the company to convert the bond at a fixed price. After he has shorted the whole 10 MM shares, he has exactly the same amount of cash on hand that he spent on the convertible, and on top of it he makes $25 MM per year (on no cash outlay, of course the process of laying the shorts takes some time and during the un-hedged time he does have both risk and cash outlays).
