Baxandall highlighted a number of arbitrage and return enhancement techniques, including convertible arbitrage, statistical arbitrage and merger arbitrage. He gave the example of “scrip dividend enhancement”, which attempts to take advantage of the fact that a number of European stocks give shareholders the option of ‘electing stock’ – acquiring more equity – rather than taking a cash dividend.
Where the terms of the stock election are determined prior to the deadline for stock election, shareholders effectively own a call option, said Baxandall. “There is value in this call option,” he said, adding that this can either be monetised directly using the over-the-counter options market or locked in through the sale of stock at some point up to the election deadline.
The week on Risk.net, July 7-13, 2018Receive this by email