gita

 

21、Capital structure arbitrage strategies attempt to capitalize on relative price-movement discrepancies observed between the debt and equity securities of an individual company. Such strategies are most effective during periods of:

A) high volatility and falling equity markets.

B) high volatility and rising equity markets.

C) low volatility and falling equity markets.

D) low volatility and rising equity markets.

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19、Which of the following would NOT likely be a suitable market neutral, fixed-income arbitrage spread trade?

A) Butterfly, or yield-curve arbitrage.

B) Asset swap trade.

C) T-bill and Eurodollar futures spread trade.

D) Arbitrage between dissimilar bonds.

gita

 

The correct answer is D

The correct “market neutral” spread trade, or fixed-income arbitrage trade, is an arbitrage between similar bonds. The other choices are all examples of different forms of spread trades. Other market-neutral, fixed-income arbitrage trades include basis trades and yield-spread trades between on-the-run and off-the-run bonds.

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17、Which of the following combinations of investment positions reflects the most common form of convertible arbitrage strategy?

A) Short position in a convertible; long position in put options on the issuer’s stock.

B) Long position in a convertible bond; long position in put options on stock of a similar firm.

C) Short position in a firm’s stock; long position in futures on the same stock.

D) Short position in a firm’s stock; long position in a convertible issued by the same firm.

gita

 

The correct answer is D

This is the most “basic” convertible arbitrage strategy.

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18、Which of the following is NOT a category of pricing inefficiencies that are likely to be exploited through fixed-income arbitrage strategies?

A) Agency biases.

B) Economic biases.

C) Segmentation biases.

D) Structural biases.

gita

 

The correct answer is B

Agency biases result from money managers who, on behalf of their clients, invest in securities with recent positive performance. Structural biases occur when tax concerns, regulatory issues, and accounting rules motivate investor purchases of certain securities. Segmentation biases are the result of institutional investors’ liquidity preferences and trading restrictions that cause pricing relationships between securities to temporarily break down.

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15、Hedge fund managers following a convertible arbitrage strategy are said to be:

A) long gamma and short vega.

B) short gamma and short vega.

C) short gamma and long vega.

D) long gamma and long vega.

gita

 

The correct answer is D

Convertible arbitrage managers hedge their equity exposure by shorting stocks using the delta hedge ratio. Because they are exposed to changes in the hedge ratio, they are said to be long gamma. They are also exposed to changes in the price volatility of the stock underlying the option embedded in the convertible security, so they are said to be long vega.

gita

 

16、A hedge fund that takes positions in convertible bonds or convertible preferred stock and then takes other positions in the underlying stock would be most accurately placed in the style category:

A) equity market neutral. 

B) convertible arbitrage. 

C) fixed income arbitrage.

D) distressed securities.