capital structure arbitrage

Capital structure arbitrage involves exploiting differences in valuation between a company's debt and equity. Investors analyze these securities to identify mispricings—such as when debt, which typically has priority for repayment, is undervalued compared to the company's equity or vice versa. By simultaneously taking positions in both debt and equity, they aim to profit as these prices realign, reflecting the company's true financial health. Essentially, it’s a strategic way to capitalize on discrepancies within a company's capital structure, assuming that market prices will eventually converge to fair values.