CAIA - 27 - Hedge Funds: Relative Value Strategies Flashcards
___ ___strategies aim to exploit deviations from stable relationships.
Relative value strategies aim to exploit deviations from stable relationships.
Put-Call Parity Equation
Call + Bond = Put + Stock
___ ___refers to opportunities that involve limited risk with the potential for large positive returns relative to the amount of risk taken.
Risk arbitrage refers to opportunities that involve limited risk with the potential for large positive returns relative to the amount of risk taken.
___ ___ is related to an unexpected change in an asset’s fundamental value resulting in a loss.
Fundamental risk is related to an unexpected change in an asset’s fundamental value resulting in a loss.
___ ___are investors who trade securities for reasons unrelated to the fundamental value of securities.
Noise traders are investors who trade securities for reasons unrelated to the fundamental value of securities.
When traders overestimate their ability to make predictions, it is a symptom of ___ ___.
When traders overestimate their ability to make predictions, it is a symptom of overconfidence bias.
Investors who make decisions in situations using past experiences from similar situations are exhibiting ___ ___.
Investors who make decisions in situations using past experiences from similar situations are exhibiting representativeness bias.
___ refers to investors relying too heavily on an initial piece of information when making decisions.
Anchoring refers to investors relying too heavily on an initial piece of information when making decisions.
When investors have stronger reactions to losses and tend to hold on to losing stocks for too long but sell winning stocks too soon, they are exhibiting ___ ___.
When investors have stronger reactions to losses and tend to hold on to losing stocks for too long but sell winning stocks too soon, they are exhibiting loss aversion.
___ ___refers to a levered fund that suffers temporary losses having its line of credit reduced or eliminated by its lender.
Leverage risk refers to a levered fund that suffers temporary losses having its line of credit reduced or eliminated by its lender.
___ ___are barriers to costless trading that can make implementation of some arbitrage strategies too costly or too risky.
Market frictions are barriers to costless trading that can make implementation of some arbitrage strategies too costly or too risky.
An ___ ___refers to asset owners hiring agents to manage their assets and, as a result, incurring costs associated with agents not serving the owners’ interests or the owners having to audit or monitor the agents.
An agency relationship refers to asset owners hiring agents to manage their assets and, as a result, incurring costs associated with agents not serving the owners’ interests or the owners having to audit or monitor the agents.
The ___ ___strategy is a relative value strategy that aims to exploit the relative mispricing of an issuers’ convertible bonds and stocks.
The convertible arbitrage strategy is a relative value strategy that aims to exploit the relative mispricing of an issuers’ convertible bonds and stocks.
Convertible arbitrage typically involves ___ convertible bonds and ___the equity.
Convertible arbitrage typically involves buying convertible bonds and shorting the equity.
3 steps to convertible arbitrage:
- ___ convertible bond
- Determine ___ ___
- Manage ___
3 steps to convertible arbitrage:
- Value convertible bond
- Determine hedge ratio
- Manage risks
Issuing convertible bonds has 2 advantages over issuing equity:
- Does not ___
- Markets don’t ___ ___
Issuing convertible bonds has 2 advantages over issuing equity:
- Does not dilute
- Markets don’t react negatively
The ___ ___represents the number of shares into which each bond can be converted.
The conversion ratio represents the number of shares into which each bond can be converted.
The ___ ___ is the effective price at which the shares are acquired through the convertible bond.
The conversion price is the effective price at which the shares are acquired through the convertible bond.
Conversion Price (Equation)
Face Value of Convertible Bond / Conversion Ratio
When an issuer can call a bond at a pre-fixed price regardless of other circumstances, it is call a ___ ___.
When an issuer can call a bond at a pre-fixed price regardless of other circumstances, it is call a hard call.
When the issuer can only call a bond if the equity price has increased above some hurdle rate, it is called a ___ ___.
When the issuer can only call a bond if the equity price has increased above some hurdle rate, it is called a soft call.
___ is the total value of the shares into which the bond can be converted.
Parity is the total value of the shares into which the bond can be converted.
Parity (equation)
(Stock Price x Conversion Ratio) / Face Value
A convertible bond with parity greater than its face value is said to be ___-___-___
A convertible bond with parity greater than its face value is said to be in-the-money
The ___ ___is the difference between the convertible bond price and parity and is expressed as a percentage of ___.
The conversion premium is the difference between the convertible bond price and parity and is expressed as a percentage of parity.
up/down factors in binomial stock price model (equation)
probability of stock price movement up in binomial model (equation)
Stock price under risk-neutral probability (equation)
Call option value of discounted risk-neutral stock price
Delta of convertible (Equation), assuming the conversion ratio equals 1.
Delta of convertible with respect to parity (equation)
Gamma as a 1st partial derivative (equation)
Gamma as a 2nd partial derivative (equation)
Cointigration test (equation)
