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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. 

gita

 

The correct answer is B

Convertible arbitrage usually takes positions in convertible bonds or preferred stock as well as warrants, etc..., and then takes other positions in the underlying stock.

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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.

gita

 

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.

gita

 

20、Which of the following statements regarding fixed-income arbitrage strategies is NOT correct?

A) The strategy is always neutral with respect to duration and credit risk.

B) The strategy attempts to trade the spread relationship between similar fixed-income securities and their derivatives.

C) Leverage is typically high.

D) Profits are from positive carry returns or from relative changes in the prices of long and short positions.

gita

 

The correct answer is A

Fixed-income arbitrage strategies may be market neutral or non-market neutral. Market neutral strategies are neutral with respect to duration and credit risk. Non-market neutral strategies are formed around expectations of yield curve or credit spread changes, so they are exposed to duration and/or credit risk.