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Not sure 🤔 if this is correct, but I think there’s at least a pair of arb trades between #STRK and #MSTR at conversion price and beyond - short one and use proceeds to go long the other.

The convertibility of STRK implies that

Price (STRK) >= Price (0.1 MSTR)

If we assume that MSTR is at 1000, STRK must be at least 100. Due to the yield and liquidation preference, STRK will have a premium.

The Effective Yield of STRK drops as its price increases, and so does the percentage of STRK price with the higher liquidation preference. So, in general, we can expect STRK premium to decline as MSTR rises (not true when broad market interest rates and/or perceived credit worthiness of the STR’s changes).

Further, with a simplifying condition that MSTR remains at and then above 1000, and STRK is at 100, we get two long/short trades

Short MSTR, long 10 STRK.

Short leg pays 1000 cash, and costs the Borrow Rate of MSTR.

Long (10 STRK) with the 1000 cash, so cost of position is covered. This position pays the Effective Yield of STRK.

All losses on the short position due to MSTR price rises are hedged by the long STRK position. If the STRK premium declines, there may be a small loss incurred.

In addition, maybe you could loan the long STRK position and earn the Borrow Rate of STRK.

Profit persists as long as

Borrow Rate (MSTR) < Effective Yield (STRK) + Borrow Rate (STRK)

Short 10 STRK, long 1 MSTR

Short leg pays 1000 again, and costs the Borrow Rate of STRK in addition to the Effective Yield of STRK.

Long 1 MSTR with this 1000, loan the MSTR share.

If the STRK premium expands, the long position doesn’t fully cover the short position here, but STRK premium will likely decline as MSTR rises.

Profit persists until

Borrow Rate (STRK) + Effective Yield (STRK) < Borrow Rate (MSTR)

Equilibrium is when

Borrow Rate (MSTR) = Effective Yield (STRK) + Borrow Rate (STRK)

At conversion and beyond, there should be short pressure on MSTR or STRK until this condition is met, causing the yield on lending your MSTR position to at minimum match the yield of an equivalent STRK position.

Even if, as likely, STRK costs more than 0.1 MSTR at 1000 dollar MSTR, the equilibrium condition just offsets by a proportional amount. In addition, I haven’t considered margin requirements for maintaining these positions.

Please reply and/or repost this if you consider it worthwhile. I welcome any insights / corrections as well!

#bitcoin #saylor

Jordan Streich 7mo ago

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