Financial Risk Manager Part 2

Get started today

Ultimate access to all questions.

Explanation:

The correct answer is B.

B is correct. Merger Arbitrage aligns perfectly with QHF's preferences. This strategy is focused on announced corporate mergers and acquisitions, seeking to profit from the price discrepancy between the current and final purchase price of the target firm's shares. The fund is exposed to the risk of the deal's failure, but skilled managers can structure trades to limit losses and possibly even generate moderate returns when deals fail. Importantly, this strategy is not overly sensitive to interest rate fluctuations and doesn't necessitate a deep understanding of distressed securities.

A is incorrect because Convertible Arbitrage focuses on exploiting pricing inefficiencies in convertible securities and their related equity, which doesn't align with QHF's desire to profit from mergers and acquisitions. Furthermore, this strategy can be sensitive to interest rate fluctuations.

C is incorrect because Fixed-Income Arbitrage involves exploiting price differences in fixed-income securities, which makes this strategy very sensitive to interest rate fluctuations against QHF's criteria.

D is incorrect because Distressed Securities investing involves buying the securities of companies in or near bankruptcy. It requires a deep understanding of distressed securities, and it doesn't focus on pricing discrepancies as QHF prefers.

Things to Remember

Risk (merger) Arbitrage event-driven hedge funds aim to capture the spreads in merger or acquisition transactions involving public companies after the transaction terms are announced.
The spread is the difference between the transaction bid and the trading price. Typically, the target stock trades at a discount to the bid to account for the risk of the transaction failing to close.
In a cash deal, the manager will usually purchase the stock of the target and tender it for the offer price at closing.
In a fixed exchange ratio stock merger, one would go long the target stock and short the acquirer’s stock according to the merger ratio to isolate the spread and hedge out

Explanation:

The correct answer is B.

Things to Remember

Risk (merger) Arbitrage event-driven hedge funds aim to capture the spreads in merger or acquisition transactions involving public companies after the transaction terms are announced.
The spread is the difference between the transaction bid and the trading price. Typically, the target stock trades at a discount to the bid to account for the risk of the transaction failing to close.
In a cash deal, the manager will usually purchase the stock of the target and tender it for the offer price at closing.
In a fixed exchange ratio stock merger, one would go long the target stock and short the acquirer’s stock according to the merger ratio to isolate the spread and hedge out

Comments (0)

No comments yet.

Q.2574 Quasar Hedge Fund (QHF) is a prominent player in the hedge fund market known for its innovative and sophisticated investment strategies. QHF has recently decided to explore opportunities arising from corporate events and seek asymmetric payoffs. The fund wants to leverage the price discrepancy between the current price of the target firm's shares and the final purchase price offered by the acquirer. Management at QHF is willing to take on risks associated with the potential cancellation or modification of deals. However, they are reluctant to get involved in strategies that are overly sensitive to interest rate fluctuations or require deep insight into distressed securities. Given their preferences, which of the following hedge fund strategies should QHF consider adopting?

Exam-Like

Community

UAnonymous

Last updated: July 5, 2026 at 07:23

Convertible arbitrage

Merger arbitrage