An arbitrage strategy that is based on buying a convertible security (like convertible bonds) and simultaneously selling short the issuing company’s  common stock. However, an investor should, first of all, try to spot a mispriced stock, then short it and buy a convertible security issued by the company thereto belongs that stock. The proceeds of shorting the stock will, of course, be deposited in an interest-bearing account, while the investor observes the stock price. If it goes up, both these proceeds and the interest on the convertible security will be weighed against the fees paid to the lender of the stock, where the net cash flow would, almost most of the time, be positive.

If the stock price drops, losses would be incurred on the short position on the stock, but the investor still receives gains from the convertible security. Nevertheless, the gains exceed the losses, and again the position produces positive net cash flows. At the same time, the falling stock price will cause the price of the convertible security to fall, though not below that of an ordinary bond issued by the same company. That is why a convertible hedge is usually seen as a relatively secure investment strategy.