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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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The correct answer is A

During periods of high volatility and falling equity markets, debt holders tend to realize the gravity of a company’s debt load before equity holders and adjust the prices of the company’s bonds before equityholders adjust the company’s stock price.

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22、Which type of arbitrage strategy seeks to take advantage of discrepancies in the movements of an individual firm’s equity and bond prices?

A) Event-driven strategy.

B) Volatility arbitrage strategy.

C) Opportunistic merger arbitrage strategy.

D) Capital structure arbitrage strategy.

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The correct answer is D

Capital structure arbitrage involves exploiting pricing inefficiencies on the right side of a firm’s actual balance sheet.

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23、Event-driven hedge fund strategies leave the:

A) unsystematic risk of individual positions unhedged, so that the individual positions have high correlations with each other. 

B) systematic risk of individual positions unhedged, so that the individual positions have low correlations with each other. 

C) systematic risk of individual positions unhedged, so that the individual positions have high correlations with each other. 

D) unsystematic risk of individual positions unhedged, so that the individual positions have low correlations with each other. 

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The correct answer is D

Event-driven strategies are based on company specific events that will impact the values of securities. Risks unrelated to the events are hedged, leaving only unsystematic risk in the positions. Since the remaining risks are company specific, the individual positions should have low correlations with each other.

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24、Which of the following combinations of investment positions is a hedge fund manager utilizing a merger arbitrage strategy most likely to establish?

A) Short position in the acquirer; long position in the acquisition target.

B) Long position in the acquirer; short position in the acquisition target.

C) Short position in both the acquirer and the acquisition target.

D) Long position in both the acquirer and the acquisition target.

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The correct answer is A

While there is deal risk in the sense that the proposed merger may never happen, the combination of a short position in the acquirer and long position in the acquisition target has the best chance of positive net return, assuming careful fundamental analysis has been performed.

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25、Which of the following would most likely NOT be a reason that a merger arbitrage strategy might fail?

A) Lack of agreement between senior management and line staff.

B) Negative earnings report from target firm.

C) Uncooperative regulatory agencies.

D) Failure to obtain shareholder approval.

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The correct answer is A

A merger arbitrage strategy would more likely fail due to a lack of agreement between senior managers. Line staff is typically not consulted. There are many more reasons a merger arbitrage strategy may fail, including time to completion and miscalculation of overall merger likelihood and conditions.