Dividend Payment in Convertible Arbitrage

Hi, my question is regarding to the example 7 - p.36 - Book 5 on Convertible Arbitrage Strategy.

It is said that the dividend payment to lender is also part of the cost. However, the borrower (of shares) also receives dividend from the company, he just passes the dividend back to the lender (of shares). Hence, no cost regarding dividend should be accounted.

Is it a valid point? Thanks.

Borrower does not receive dividends. He borrows shares to short sell them. Hence, whatever dividend lender is bound to receive the borrower must compensate for the same, adding to the borrowers cost.

1 Like