Financial Risk Manager Part 1
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You are being asked to consider a hedge fund that is long US$459 million in a given set of equities and short US$258 in another set of stocks. Assuming that the risk free rate of interest is 1.09%, the fund’s equity is US$222 and the fund’s beta is approximately 0.59, determine this entity’s Gross Leverage and Net Leverage.
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UAnonymous
A
Gross Leverage = 3.23 Net Leverage = 0.91
B
Gross Leverage = 4.25 Net Leverage = 23
C
Gross Leverage = 2.89 Net Leverage = 87
D
Gross Leverage = 1.69 Net Leverage = 25
E
Gross Leverage = 3.87 Net Leverage = 68
F
Gross Leverage = 4.59 Net Leverage = 88
Explanation:
Gross Leverage measures the total exposure (both long and short positions) relative to equity, while Net Leverage measures the net exposure (long minus short positions) relative to equity.\n\nGiven:\n- Long position = 459 million\n- Short position = 258 million\n- Equity = 222 million\n\nGross Leverage = (Long + Short) / Equity = (459 + 258) / 222 = 717 / 222 ≈ 3.23\n\nNet Leverage = (Long − Short) / Equity = (459 − 258) / 222 = 201 / 222 ≈ 0.91\n\nThe risk-free rate and beta are irrelevant for this calculation, as they pertain to other risk measures. Therefore, the correct answer is A.
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