Convertible Bond Arbitrage and the Term Structure of Volatility

Economic Significance of Arbitrage Transactions in the Tesla Industry

“…The company's shares, which had declined by approximately 10% in the two years after selling the last convertible, ended over 4% higher during the same period. From Figure 9 and Figure 10, the new convertible bond arbitrage carried a coupon that ranged between 1.5 to 2.0% with a conversion premium of 27.5-32.5% as far as Tesla share's reference price during the sale is concerned [11]. The above terms seem inferior for the investors compared to the 2.375% coupon based on the $977.5 million convertible bonds that had matured by March 2022 [11].…”

“…The number of assets an arbitrageur purchases or sells largely depends on the relevant and most appropriate hedge ratio, which can quickly be evaluated using the delta. Notes: This table is from Renewable electricity finance in the United States: A state-of-the-art review [11].…”

“…From Figure 9 and Figure 10, the new convertible bond arbitrage carried a coupon that ranged between 1.5 to 2.0% with a conversion premium of 27.5-32.5% as far as Tesla share's reference price during the sale is concerned [11]. The above terms seem inferior for the investors compared to the 2.375% coupon based on the $977.5 million convertible bonds that had matured by March 2022 [11]. The conversion premium characterized by a midpoint of 30% compared less favorably with the 2022 bond's lowest conversion premium, which stood at 25%.…”

“…The conversion premium characterized by a midpoint of 30% compared less favorably with the 2022 bond's lowest conversion premium, which stood at 25%. However, during this time, the stock's underperformance eventually closed at $244.10, which implied that the holders of the 2022 bond required an approximately 34% increment in the stock to a price of $327.50 to facilitate a conversion [11]. According to a potential buyer for the new bonds, the convertible's terms seemed reasonable, and the company had no issue selling them.…”

“…Between November and November, the company experienced a share increase of approximately 30%. On the other hand, the short interest was significantly reduced by about 23% [11]. The reaction from the shorts never came as a surprise to anyone, given that Tesla was already one of the leading shorted equities in the United States based on the dollar value and outstanding shares.…”