How many shares of the stock must be shorted in order to create a market neutral position by holding the convertible bond and shorting the stock?
What will be an ideal response?
The combined position of the convertible bond and the short position in the stock is said to be delta hedged, delta neutral, or market neutral. The number of shares that should be shorted is given by: delta times the conversions ration. For our problem, the delta is 0.70 and the conversion ratio of 20 . Multiplying these values gives 0.70 × 20 = 14 . This means that 14 shares must be shorted in order to obtain a market neutral position.
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