Reading 73: Alternative Investments Losk习题精选 periods, border, 2010, assets

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LOS k: Discuss the leverage and unique risks of hedge funds.

In periods of high volatility, hedge funds may encounter broker-dealers that adopt policies of extremely conservative marking-to-market of fund assets. This is called:

A) counterparty risk.

B) pricing risk.

C) settlement risk.

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Counterparty risk is the exposure to the creditworthiness of the broker-dealers that hedge funds transact with. Settlement risk describes the risk that a counterparty, such as a broker-dealer, fails to deliver a security as agreed. Pricing risk occurs when broker-dealers, in order to protect themselves, adopt extremely conservative pricing policies, which in turn requires hedge funds to post a greater margin.

 

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Which of the following strategies is least likely to be used by a hedge fund to increase leverage?

A) Borrowing external funds.

B) Pursuing arbitrage opportunities.

C) Margin borrowing.

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Borrowing through a margin account and borrowing external funds are methods commonly used by hedge funds to increase leverage. Hedge funds are generally allowed to pursue arbitrage opportunities, which may or may not increase leverage.