Convertible bond arbitrage example from book

[Kamal136]

For example 7 and reading 19, I see they find conversion price is 24 and the current share price is 30. Is this the only two values we need to see if CBA works? In the question it says that share price of 30 is overvalued because the price/earning ratio of company is higher than the industry averages but does this information matter?

With conversion price less than share price, can we long the undervalued convertible bond and short the overvalued stock regardless if industry information?

[Okachiang]

@Kamal136

Is this the only two values we need to see if CBA works?

Yes.

@Kamal136

In the question it says that share price of 30 is overvalued because the price/earning ratio of company is higher than the industry averages but does this information matter?

I think it’s important in practice. In the case of the P/E ratio is equal or lower than the average you could still make profits by this arbitrage but you may make more by waiting some days until the stock value is not undervalued anymore.

@Kamal136

With conversion price less than share price, can we long the undervalued convertible bond and short the overvalued stock regardless if industry information?

Yes. To judge the undervalue or overvalue of the stock, the baseline is the convertible price. However, P/E ratio is used to compare stock value within the industry.