Answer: Short implied volatility

## Explanation In a convertible arbitrage strategy: - **Long convertible bonds**: These are hybrid securities with both bond and equity characteristics - **Short Treasuries**: Hedges the interest rate risk (duration) of the convertible bond - **Short underlying stock**: Hedges the equity exposure (delta) After these hedges, the remaining exposure is typically: - **Short implied volatility**: Convertible bonds are long vega (benefit from rising volatility), but the arbitrage strategy often involves selling volatility to capture the volatility premium. This creates short vega exposure, making the strategy vulnerable to increases in implied volatility. - **Long duration**: This is NOT correct because the short Treasury position hedges the duration risk of the convertible bond. - **Long stock delta**: This is NOT correct because the short stock position hedges the equity delta exposure. - **Positive gamma**: This is NOT correct because convertible arbitrage strategies typically have negative gamma exposure due to the short volatility position. Therefore, the primary remaining risk in this hedged convertible arbitrage strategy is **short implied volatility** (option A).

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