AIMs: Describe the underlying characteristics, sources of returns and risk exposures of various Relative Value hedge fund strategies including: Market-neutral; Statistical arbitrage; Market timing; Convertible Arbitrage; Fixed-income arbitrage; Volatility arbitrage; and Capital structure arbitrage
Questions:
5.1. An equity market-neutral hedge fund manager is LEAST LIKELY to employ which of the following methods or tactics?
a. Pair trades
b. Builds factor models; e.g., Fama-French HML, SMB and UMD factors
c. Tilt to high beta (systemic risk) when overall stock market is undervalued
d. Exploits inefficiencies between market prices and theoretical fair values (or mean reversion to fair values)
5.2. Which of the following is TRUE about an equity market-neutral hedge funds strategy?
a. Leverage is low or non-existent
b. Exposed to idiosyncratic risks
c. Strategy is directional
d. Avoids fundamental research as implicitly believes semi-strong efficient market hypothesis (EMH) is valid
5.3. A convertible arbitrage manager is long convertible bonds and short the underlying stock of the same company. This manager can expect returns due to EACH of the following EXCEPT:
a. Static returns on the bond coupon income and short stock rebate
b. Positive gamma
c. Exploiting pricing inefficiencies if the bond and/or stock is mis-priced
d. Positive delta
5.4. A fixed income arbitrage manager is long US Treasury bonds and hedged with a long position in an interest rate swap where the manager is paying-fixed, receiving-floating, where durations are similar. Under which outcome is the strategy (i.e., net position) most likely to LOSE the most value?
a. An increase in the level of interest rates (market risk)
b. A decrease in the level of interest rates (market risk)
c. An increase in the swap-Treasury spread
d. A decrease in the swap-Treasury spread
5.5. Each of the following is an example of a volatility arbitrage trade EXCEPT:
a. Dynamic delta hedge: long call options hedged with short stock position
b. Long straddle when implied volatility is deemed too low
c. Long bull spread when the implied volatility is deemed too low
d. Short strangle when implied volatility is deemed too high
5.6. Each of the following is an example of a capital structure arbitrage EXCEPT:
a. Short CDS (sell credit protection) plus long call option on stock of same company
b. Long CDS (buy credit protection) plus long call option on stock of same company
c. Long bond plus short stock of same company
d. Long junior debt tranche plus short senior debt tranche of same company
Answers:
Questions:
5.1. An equity market-neutral hedge fund manager is LEAST LIKELY to employ which of the following methods or tactics?
a. Pair trades
b. Builds factor models; e.g., Fama-French HML, SMB and UMD factors
c. Tilt to high beta (systemic risk) when overall stock market is undervalued
d. Exploits inefficiencies between market prices and theoretical fair values (or mean reversion to fair values)
5.2. Which of the following is TRUE about an equity market-neutral hedge funds strategy?
a. Leverage is low or non-existent
b. Exposed to idiosyncratic risks
c. Strategy is directional
d. Avoids fundamental research as implicitly believes semi-strong efficient market hypothesis (EMH) is valid
5.3. A convertible arbitrage manager is long convertible bonds and short the underlying stock of the same company. This manager can expect returns due to EACH of the following EXCEPT:
a. Static returns on the bond coupon income and short stock rebate
b. Positive gamma
c. Exploiting pricing inefficiencies if the bond and/or stock is mis-priced
d. Positive delta
5.4. A fixed income arbitrage manager is long US Treasury bonds and hedged with a long position in an interest rate swap where the manager is paying-fixed, receiving-floating, where durations are similar. Under which outcome is the strategy (i.e., net position) most likely to LOSE the most value?
a. An increase in the level of interest rates (market risk)
b. A decrease in the level of interest rates (market risk)
c. An increase in the swap-Treasury spread
d. A decrease in the swap-Treasury spread
5.5. Each of the following is an example of a volatility arbitrage trade EXCEPT:
a. Dynamic delta hedge: long call options hedged with short stock position
b. Long straddle when implied volatility is deemed too low
c. Long bull spread when the implied volatility is deemed too low
d. Short strangle when implied volatility is deemed too high
5.6. Each of the following is an example of a capital structure arbitrage EXCEPT:
a. Short CDS (sell credit protection) plus long call option on stock of same company
b. Long CDS (buy credit protection) plus long call option on stock of same company
c. Long bond plus short stock of same company
d. Long junior debt tranche plus short senior debt tranche of same company
Answers:
