Chartered Financial Analyst Level 2
Get started today
Ultimate access to all questions.
48 A hedge fund manager is reviewing the following securities:
- Common stock of Company 1
- Non-voting stock of Company 1
- Common stock of Company 2 (a subsidiary of Company 1)
The equity market-neutral trading strategy known as 'stub trading' most likely involves buying the common stock of Company 1 and selling:
Exam-Like
A
the common stock of Company 2.
B
the non-voting stock of Company 1.
C
both the common stock of Company 2 and the non-voting stock of Company 1.
Explanation:
Explanation
Stub trading is an equity market-neutral strategy that involves:
- Buying the parent company's stock (Company 1 common stock)
- Selling the subsidiary's stock (Company 2 common stock)
This strategy exploits valuation discrepancies between a parent company and its publicly traded subsidiary. The "stub value" represents the implied value of the parent company's non-subsidiary assets after subtracting the market value of its stake in the subsidiary.
Why Option A is correct:
- Stub trading specifically targets the relationship between parent and subsidiary companies
- The strategy assumes the market may be mispricing the parent company relative to its ownership stake in the subsidiary
- By going long the parent and short the subsidiary, the trader captures any convergence in their relative valuations
Why other options are incorrect:
- Option B (non-voting stock) involves different share classes of the same company, not parent-subsidiary relationships
- Option C (both) would create unnecessary complexity and doesn't align with the core stub trading concept
This strategy is commonly used in hedge funds and falls under alternative investments strategies.
Comments
Loading comments...