Asked by Annisa Rahma Putri on Jul 23, 2024
Verified
If the yield on mortgage-backed securities was abnormally high compared to Treasury bonds, a hedge fund pursuing a relative value strategy would
A) short sell the Treasury bonds and short sell the mortgage-backed securities.
B) short sell the Treasury bonds and buy the mortgage-backed securities.
C) buy the Treasury bonds and buy the mortgage-backed securities.
D) buy the Treasury bonds and short sell the mortgage-backed securities.
E) None of the options are correct.
Treasury Bonds
Long-term government debt securities with a fixed interest rate, issued by the U.S. Treasury.
Relative Value Strategy
An investment strategy that seeks to identify and exploit differences in the prices of related financial instruments, such as stocks and bonds, for potential profit.
- Acquire knowledge on the diverse approaches used by hedge funds and their application in the finance sectors.
- Assess the repercussions of macroeconomic indicators and market dynamics on the approaches utilized by hedge funds.
Verified Answer
KR
Katia RubioJul 24, 2024
Final Answer :
B
Explanation :
A relative value strategy seeks to exploit price differences between related financial instruments. If mortgage-backed securities yield abnormally high compared to Treasury bonds, a hedge fund would likely buy the mortgage-backed securities (to capitalize on the higher yield) and short sell the Treasury bonds (betting that their prices will fall or underperform relative to the mortgage-backed securities), aiming to profit from the convergence of their yields.
Learning Objectives
- Acquire knowledge on the diverse approaches used by hedge funds and their application in the finance sectors.
- Assess the repercussions of macroeconomic indicators and market dynamics on the approaches utilized by hedge funds.
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