A hedge fund manager is forming an arbitrage potfolio in the fixed income market. Today, a...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A hedge fund manager is forming an arbitrage potfolio in the fixed income market. Today, a coupon bond C that matures in 3 years is traded at 95.03 with semi-annual coupon 2% while a zero-coupon bond Z that matures in 10 years is traded at 102.45 Both C and Z have the same principal P). Based on a benchmark model, the manager identifies that C is being underpriced and Z is being overpriced in the market. Subsequently, the manager takes a long position on C and a short position on Z such that the absolute position value of the long position is equal to that of the short position (e.g. $1 million long position in C and $1 million short position in Z). Which of the following statement(s) is CORRECT according to the above? (Assume that the manager's benchmark model is correct.) i. The manager's arbitrage position should not have any systematic risk. ii. If market interest rates go up, the value of the position would go up. iii. The higher the change in market interest rates, the higher the change in the value of the position at an increasing rate (= convex relationship). Οί O ii. O iii O i and iii A hedge fund manager is forming an arbitrage potfolio in the fixed income market. Today, a coupon bond C that matures in 3 years is traded at 95.03 with semi-annual coupon 2% while a zero-coupon bond Z that matures in 10 years is traded at 102.45 Both C and Z have the same principal P). Based on a benchmark model, the manager identifies that C is being underpriced and Z is being overpriced in the market. Subsequently, the manager takes a long position on C and a short position on Z such that the absolute position value of the long position is equal to that of the short position (e.g. $1 million long position in C and $1 million short position in Z). Which of the following statement(s) is CORRECT according to the above? (Assume that the manager's benchmark model is correct.) i. The manager's arbitrage position should not have any systematic risk. ii. If market interest rates go up, the value of the position would go up. iii. The higher the change in market interest rates, the higher the change in the value of the position at an increasing rate (= convex relationship). Οί O ii. O iii O i and iii
Expert Answer:
Answer rating: 100% (QA)
i The managers arbitrage position should not have any systematic risk In an arbitrage position the g... View the full answer
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Posted Date:
Students also viewed these finance questions
-
Create a database using professional principles and standards. Use a relational database software application to develop a database implementing the logical design into a physical design. Use an...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Describe the research question, research method and data sources of a research paper which has used these accounting values and cultural dimensions, and assess the significance of such research.
-
In the circuit in Fig the switch, which has been closed for a long time, opens at t=0. Find the value of the capacitor voltage Vc(t) at t=2s. t-o 12V t 100
-
Allen Company acquired 100 percent of Bradford Company's voting stock on January 1, 2014, by issuing 10,000 shares of its $10 par value common stock (having a fair value of $14 per share). As of that...
-
The tube shown in Figure 9.8 is subjected to an internal pressure, \(p=5 \mathrm{MPa}\), instead of a torque. Neglecting the stress along the longitudinal axis of the tube, and assuming that the mode...
-
You are considering an investment in two projects, A and B. Both projects will cost $100,000, and the projected cash flows are as follows: a. Assuming that the WACC is 8%, calculate the payback...
-
I. What is the output from the C program below? You must run it on one of the fox machines. No points for these. global var g is at param a is at char *s1 is at which points to char *s2 is at which...
-
Figure a shows a Houdaille damper, which is a device attached to an engine crankshaft to reduce vibrations. The damper has an inertia Id that is free to rotate within an enclosure filled with viscous...
-
Selected transactions for Indigo Corporation during its first month in business are presented below. Sept. 1 Issued common stock in exchange for $18,300 cash received from investors. Purchased...
-
Give a detailed description of your company's logistics operations. Does your company employ any 3PL services? If so, give details. If you cannot locate any specific information do you think they do...
-
Does a surplus or a shortage of workers play a role in how organizations recruit? Discuss.
-
A sinusoidal electromagnetic wave has a peak electric field of 8.00 kV/m. What is the intensity of the wave?
-
A wheel of diameter 5.0 cm has a 3.0 m cord wrapped around its periphery. Starting from rest, the wheel is given a constant angular acceleration of 1.0 rad/s?. How long does it take for the cord to...
-
Ultraviolet light of wavelength 3 4 0 nm falls on a double slit. A fluorescent screen is placed 2 . 0 m away. The screen shows dark interference bands 3 . 4 cm apart. What is the distance between the...
-
If the market for a product is broadly defined, then there are few substitutes for the product and the demand for the product is relatively inelastic. the expenditure on the good is likely to make up...
-
Representative data read from a plot that appeared in the paper Effect of Cattle Treading on Erosion from Hill Pasture: Modeling Concepts and Analysis of Rainfall Simulator Data (Australian Journal...
-
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.Suppose Mydecos costs and expenses had been the same fraction of revenues in 20162019 as they were in 2015.What...
-
Your firm has a committed line of credit with your bank with a commitment fee of 0.5% (EAR) and an interest rate of 6% (EAR). The total line is $500,000 and you borrowed $300,000 at the beginning of...
-
Suppose Compco Systems pays no dividends but spent $5 billion on share repurchases last year. If Compcos equity cost of capital is 12%, and if the amount spent on repurchases is expected to grow by...
-
(a) Consider a single elementary magnet inside a closed surface. Given that elementary magnets are particles without spatial extent, is the magnetic field line flux through the closed surface...
-
What is the direction of the magnetic field lines inside the bar magnet of Figure 27.13? Figure 27.13 Magnetic field line pattern surrounding a bar magnet. N S
-
Can you replace the current-carrying rod of Figure 27.16 by a magnet and get the same magnetic field? Figure 27.16 A flow of charge carriers through a conducting rod causes a circular alignment of...
Study smarter with the SolutionInn App