Hedge Fund Glossary

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Call Spread Overlay

a Hedging transaction in which the Issuer simultaneously purchases a Call Option that mimics the Call Option embedded in a series of Convertible Bonds and then sells a Warrant on the same number of underlying shares at a higher Strike Price. The net effect is an increase in the Conversion Premium of the Convertible Bonds to the Strike Price of the Warrant. There may also be favorable tax benefits to the Issuer. Call Spread Overlays are a common companion to new Convertible Bond issuances. Also known as a “bond hedge overlay.”

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