Concept: Conversion

CFA Level I Glossary

In options, a conversion is an arbitrage trade that is long the underlying and short a synthetic underlying built from put-call parity (short call, long put, and financing). If the synthetic is mispriced relative to the actual stock, the conversion locks in a riskless edge when parity is violated. It is the mirror image of a reversal. Candidates often mix conversion and reversal directions.

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