CFM Hedge Fund Strategies & Operations 2

Question 1

A global macro hedge fund manager believes the European Central Bank will cut rates aggressively over the next six months. Which position best expresses this view?

Accepted Answer

Long Bund futures

Answer

Long Bund futures profits as German bond prices rise when the ECB cuts rates, directly expressing a rate-decline thesis.

Question 2

In a merger arbitrage strategy, the spread between the target's current price and the deal price primarily compensates the investor for:

Accepted Answer

Deal break risk

Answer

The merger arbitrage spread represents compensation for deal break risk — the probability that the transaction fails to close.

Question 3

A convertible bond arbitrage fund buys a convertible bond and shorts the underlying equity. The primary risk this trade is designed to exploit is:

Accepted Answer

Convertible bond mispricing relative to its theoretical value

Answer

Convertible arbitrage seeks to profit when convertible bonds trade at a discount to their theoretical fair value derived from embedded optionality and credit components.

Question 4

Which operational risk is most unique to hedge funds relative to traditional long-only managers?

Accepted Answer

Prime broker counterparty risk

Answer

Hedge funds use prime brokers for leverage, securities lending, and custody, creating material counterparty exposure not typical in long-only management.

Question 5

A fund employing a fixed income relative value strategy buys 10-year Treasuries and shorts 30-year Treasuries. This position profits if:

Accepted Answer

The yield curve flattens

Answer

Buying the 10-year and shorting the 30-year profits when the yield curve flattens, as the spread between long and short yields narrows.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Hedge Fund Strategies & Operations 2