A hedge fund with a fixed-income arbitrage strategy is most likely to suffer a loss when: A)
| credit spreads widen quickly. |
| B)
| leverage becomes less expensive. |
| C)
| markets for lower quality debt become more liquid. |
|
Fixed-income arbitrage generally involves buying high-yielding (low quality) bonds while selling low-yielding (high quality) bonds. Leverage can be used in place of selling high quality bonds. This strategy can suffer great losses when credit spreads widen quickly, when leverage becomes more expensive, or when the markets for low-quality debt become less liquid. |