If it's hedging the convertibles, they'll be shorting more on a rally, not covering. They'll be hoping for as much volatility as possible too. I did my own scenario analysis for pricing the CN and the only way to make the current bond as cheap as it is now is for volatility to be low (around 32% annualised), which is much lower than recent historical vol. If realised volatility stays where it is to maturity, the embedded option is incredibly cheap and the owner will make huge money trading the hedge. Those long the note and short the stock will be rubbing their hands together!
Shorts up to 7.2%, page-6
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$1.72 |
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