MicroStrategy Has Volatility to Sell
Also Kiromic, fake insider betting and the optimal amount of bribery.
Programming note: Money Stuff will be off tomorrow and early next week, back Wednesday, Dec. 11.
Here’s the basic idea of convertible arbitrage. You buy a convertible bond that will pay you back, in a year, either (1) $1,000 in cash or (2) 20 shares of the company’s stock. (Or some other “conversion ratio”; 20 is an arbitrary simple number.) If the stock today is at, say, $2 per share, then those 20 shares of stock are worth $40, and you will almost definitely want the $1,000 in a year. If the stock today is at $200 per share, then those 20 shares of stock are worth $4,000, and you will almost definitely want the stock in a year. At very high stock prices, the convertible bond is essentially equivalent to stock; at very low stock prices, it is essentially equivalent to a $1,000 bond.