Chartered Financial Analyst Level 2
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52 In order to profit from expected mean reversion in the yield curve, a fixed-income arbitrage fund can take long and short positions in:
Exam-Like
A
the same issuer, but not different issuers within the same industry.
B
different issuers within the same industry, but not the same issuer.
C
either the same issuer or different issuers within the same industry.
Explanation:
Explanation
Fixed-income arbitrage strategies aim to profit from temporary pricing discrepancies in the bond market. When expecting mean reversion in the yield curve, a fund can employ various approaches:
- Same issuer: Taking long and short positions in different bonds from the same issuer (e.g., different maturities) to exploit yield curve anomalies
- Different issuers within same industry: Taking positions in bonds from different companies within the same industry to capitalize on relative value opportunities
Why Option C is correct:
- Fixed-income arbitrage funds can use both approaches to profit from mean reversion
- Same issuer positions help capture yield curve normalization
- Different issuer positions help capture credit spread normalization
- The flexibility to use either approach allows the fund to pursue the most attractive opportunities
Why other options are incorrect:
- Option A is too restrictive by excluding different issuers
- Option B is too restrictive by excluding the same issuer
- Both approaches are valid in fixed-income arbitrage strategies
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