Conversion arbitrage is a low-risk strategy involving the purchase of an asset, a sale option, and a buy option with the same exercise and expiration price. It can generate quick gains but may also result in small losses depending on market factors.
Conversion arbitrage is an inversion strategy that essentially involves three specific actions that take place at the same time. It is understood that the execution of this type of arbitrage focus is relatively free from risks for the reverser, although it has the ability to strengthen the inversion position in relation to the general stability of the inversion chart. Sometimes referred to as a square of wide options, the conversion arbitrage will always include elements that hold the same price of vencimiento and the same price of exercise.
The three transactions that make a conversion arbitrage are very simple. The first transaction implies the purchase of an asset. This transacción de acciones a veces is called acquisition of the subyacente and forms the basis of the process.
It occurs simultaneously with the purchase of the underlying asset and the purchase of a vending option. This option of sale will tend to the same prices of exercise and the same cost of vencimiento that the asset is subject to. It is essential that the price and the wages of venice are identical for which the strategy works.
The final element in conversion arbitrage is the sale of a buy option. Just as the underlying asset and the purchase option, the purchase option must have the same price of vencimiento and the same price of exercise. The sale of the purchase option must be carried out at the same time as the purchase of the sale option and the acquisition of the underlying asset.
In some variations of the focus of conversion arbitrage, the real purchase of the underlying asset is replaced with the future purchase on a underlying asset. However, there is a certain difference of opinion between financial analysts regarding the use of futures in the structure of a conversion arbitrage, which is more or less useful than the actions in the general strategy.
In general, the use of a conversion arbitrage is not meant to be a medium to obtain a huge and fast return. Without embargo, the strategy can generate a rapid gain depending on the actual state of the monetary market. At the same time, if the factors on the market cause the buy and sell option to be overvalued or undervalued for some reason, this can lead to a situation in which small losses or short-term wagers can be produced.
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