They could short the overpriced warrants and buy an equivalent chunk of stock to hedge their bet. If the stock started to rise unexpectedly, their downside would be covered by the stock. The formula also gave them a method to calculate how much stock they needed to hold in order to hedge their position. In the best of all worlds, the warrant price would decline and the stock would rise, closing out the inefficiency and providing a gain on each side of the trade. This strategy came to be known as convertible bond arbitrage. It has become one of the most successful and lucrative trading
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