Reference no: EM1320451971. The price of ABCD is $25. You establish the following position: Show
Short 1 ABCD 25 Call @ 2 If the delta of the call is 0.50, what would be the theoretical price of the option if ABCD increased by $1.00? a. $1.50 b. $2.50 c. $3.00 d. $4.00 e. $4.50 2. Which one of the following is a synthetic long put? a. Long stock, short put b. Long stock, short call c. Long stock, long put d. Short stock, long put e. Short stock, long call 3. You establish the following position: Short 1 ABCD 320 Put @ 6 If the delta of the put is 0.50 and the gamma is 0.03, what would the new delta be if ABCD decreases from 321 to 320? a. 0.47 b. 0.50 c. 0.53 d. 0.56 e. 0.60 4. Which of the following choices is a primary component in theoretical options pricing calculations? a. Volatility b. Annual interest rate c. Stock price d. Days to expiration e. Strike price f. All of the above 5. You have established the following positions: Long 500 ABC Nov 1240 Calls @ 5 Long 500 ABC Nov 1205 Puts @ 6 What is the traditional margin requirement? a. $500,000 b. $550,000 c. $600,000 d. $700,000 6. Which one of the following choices measures the rate of decline in value of an option due to time decay? a. Delta b. Gamma c. Theta d. Vega 7. With everything being equal as time passes in options, which one of the following is true? a. In the money options delta decrease and out of money options delta increase b. In the money options delta increase and out of money options delta increase c. Both in the money options delta decrease and out of money delta decrease d. In the money delta increase and out of money options delta decrease 8. Which one of the following choices measures the change in price of an option for a one point move in the underlying asset? a. Delta b. Gamma c. Theta d. Vega 9. To hedge a short stock position in ABCD, you can do all of the following EXCEPT what? a. Buy at the money ABCD calls to open b. Buy in the money ABCD calls to open c. Sell out of money ABCD puts to open d. Sell out of money ABCD calls to open 10. In portfolio margin, equity options and stocks are tested with +/- 15% price changes. If you buy $100,000 of ABCD stock, what is the portfolio margin requirement? a. $15,000 b. $25,000 c. $30,000 d. $50,000 11. You opened several accounts with XYZ broker. Which of the following accounts is under identical ownership as your individual portfolio margin account? a. Your Roth Individual Retirement Account b. Your Individual Margin Account c. Your Joint Account with Rights of Survivorship d. Your Corporate Account e. Your 401(k) Account 12. You have already been approved for covered call writing but must be re-approved for which one of the following in order to participate in portfolio margining? a. Purchasing Straddles b. Purchasing Spreads c. Purchasing Options d. Short-selling e. Selling Uncovered Options 13. All LEAPS are what? a. Unlisted derivatives of equity indices b. Options on commodities and futures contracts c. Issued with longer life than standard options d. Options on Exchange Traded Funds e. Options on individual stocks 14. If you write a call, hoping to benefit from the time decay of the options premium, which one of the following measures would you use? a. Theta, expressed in percentage b. Theta, expressed in dollars c. Delta, expressed in percentage d. Delta, expressed in dollars e. Gamma, expressed in percentage 15. Which one of the following choices measures how the delta of an option will change relative to a one point move in the underlying asset? a. Delta b. Gamma c. Theta d. Vega e. Rho 16. Which one of the following is a synthetic long call? a. Long stock, short put b. Long stock, short call c. Short stock, long put d. Long stock, long put e. Short stock, long call
List of Most Common Hedge Fund Strategies
Let us discuss each of them in detail. You are free to use this image on your website, templates, etc., Please provide us with an
attribution linkArticle Link to be Hyperlinked #1 – Long/Short Equity Strategy
Example
#2 – Market Neutral Strategy
Example
#3 – Merger Arbitrage Strategy
ExampleConsider these two companies– ABC Co. and XYZ Co.
#4 – Convertible Arbitrage
Example
#5 – Capital Structure Arbitrage
ExampleAn example could be – A news of a particular company performing poorly. In such a case, both its bond and stock prices are likely to fall heavily. But the stock price will fall by a greater degree for several reasons like:
#6 – Fixed-Income Arbitrage
ExampleA Hedge fund has taken the following position: Long 1,000 2-year Municipal BondsA municipal bond is a debt security issued by a national, state, or local authority to finance capital expenditures on public projects related to the development and maintenance of infrastructures such as roads, railways, schools, hospitals, and airports.read more at $200.
After your first year, the amount that you have made, assuming that you choose to reinvest the interest in a different asset, will be: $200,000 x .06 = $12,000 After two years, you will have made $12000*2= $24,000. But you are at risk the entire time of:
So you want to hedge this duration risk. The Hedge Fund Manager Shorts Interest Rate SwapsAn interest rate swap is a deal between two parties on interest payments. The most common interest rate swap arrangement is when Party A agrees to make payments to Party B on a fixed interest rate, and Party B pays Party A on a floating interest rate.read more for two companies that pay out a 6% annual interest rate (3% semi-annually) and are taxed at 5%. $200,000 x .06 = $12,000 x (0.95) = $11,400 So for 2 years it will be: $11,400 x 2 = 22,800 Now, if this is what the Manager pays out, then we must subtract this from the interest made on the Municipal Bond: $24,000-$22,800 = $1,200 Thus $1200 is the profit made. #7 – Event-Driven
ExampleOne example of an Event-driven strategy is distressed securities. In this type of strategy, the hedge funds buy the debt of companies in financial distressFinancial Distress is a situation in which an organization or any individual is not capable enough to honor its financial obligations as a result of insufficient revenue. It is usually the result of high fixed costs, obsolete technology, high debt, improper planning and budgeting, and poor management, and it can eventually lead to insolvency or bankruptcy.read more or have already filed for bankruptcy. If the company has yet not filed for bankruptcy, the Manager may sell short equity, betting the shares will fall when it does file. #8 – Global Macro
ExampleAn excellent example of a Global Macro Strategy is George Soros shorting the pound sterling in 1992. He then took a massive short position of over $10 billion worth of pounds. He consequently profited from the Bank of England’s reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float the currency. Soros made 1.1 billion on this particular trade. #9 – Short Only
Top Hedge Fund Strategies of 2014Below are the Top Hedge Funds of 2014 with their respective hedge fund strategies – source: PrequinAlso, note the hedge funds Strategy distribution of the Top 20 hedge funds compiled by Paquin. source: Prequin
ConclusionHedge Funds do generate some outstanding compounded annual returns. However, these returns depend on your ability to properly apply Hedge Funds Strategies to get those handsome returns for your investors. While most hedge funds use Equity StrategyAn equity strategy is a long-short strategy on equity stock which involves taking a long position on those shock which are bullish (i.e., expected to increase its value) and taking a short position on stocks which are bearish (i.e., expected to decline or fall its value) and hence booking a sufficient profit from the difference.read more, others follow Relative Value, Macro Strategy, Event-Driven, etc. You can also master these hedge fund strategies by tracking the markets, investing, and learning continuously. Recommended Articles
How to hedge a short option position?Options give short sellers a way to hedge their positions and limit the damage if prices unexpectedly go up.. It is possible to hedge a short stock position by buying a call option.. Hedging a short position with options limits losses.. This strategy has some drawbacks, including losses due to time decay.. Can you hedge a short with a call option?The call option constitutes effective protection against a rise in the market price of the security sold short, since it establishes the maximum price to be paid to buy back the shares. Buying call options to hedge a short sale of shares.
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