Question #19 - Reading 34 Hedge Fund Strategies

Reading: Reading 34 Hedge Fund Strategies

PDF File: Reading 34 Hedge Fund Strategies.pdf

Page: 8

Status: Incorrect

Correct Answer: A

Your Answer: B

Shared Context

- To capture the pricing discrepancy between the Treasury bond market and the swaps market, Winstanton should execute which of the following trades? A) Buy Treasuries, Sell TIPS, pay fixed under inflation swap. B) Sell Treasuries, sell TIPS, receive fixed under inflation swap. C) Buy Treasuries, buy TIPS, pay fixed under inflation swap.

Question

The immediate arbitrage profit from buying the TST convertible bond and converting into shares is closest to:

Answer Choices:

A. USD 6 per share

B. USD 4 per share

C. USD 10 per share

Explanation

Purchasing USD 1,000 par of the bond at a price of 115 per cent of par costs USD 1,000 × (115 / 100) = USD 1,150. The cost per share of owning the shares through buying the convertible bond and converting is, therefore, USD 1,150 / 25 = USD 46. The current shares are worth USD 50 in equity markets; hence, investors can lock in a USD 4 gain immediately from buying the convertible and short selling the shares today.

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