Hedge fund Raritan Item set

Q 4 Based on the data in Exhibit 1, what strategy is the Orion portfolio manager most likely implementing?

  1. Taking advantage of option mispricing
  2. Profiting from extreme market volatility
  3. Going long a put on the equity net of hedging

1 is correct - I do not understand.

did you get an answer about this?

By going long the convertible bond he’s going long the call option on the convertible. He’d go long convertible bond only if it’s trading at a lower rate than the stock. Because he thinks the stock is overpriced, he went long the put on the stock. These 2 positions together create a convertible bond arbitrage. Hope this helps.

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Does anyone know why you would short the CDS?

Does anyone know why you would short the CDS?

You don’t want the risk of asset

You are long the convertible this is long:
Bond - includes interest rate and credit risk
Call on share - whihc you think is mis priced

You what to take out the risks you don’t want
Share risk
Credit risk
Interest risk

Left with mispricing of option linked to covertible verus underlying vol of stock.

But if you own the convertible bond, you are exposed to the credit risk of the issuer. Wouldn’t you want to buy the CDS (long the CDS - buying insurance) to get rid of the credit risk?

The terminology around CDS is unclear. Buyers of protection are short the risk.

In this question I think you can use the 3rd column “hedge credit risk” to tell you what is happening

from the text.

. In single-name CDS, the buyer of credit protection is short credit exposure and the seller of credit protection is long credit exposure. This is consistent with the fact that in the financial world, “shorts” are said to benefit when things go badly. When credit quality deteriorates, the credit protection buyer benefits, and when it improves, the credit protection seller benefits. To make things even more confusing, though, the opposite is true in CDS index positions: The buyer of a CDX is long credit exposure and the seller of a CDX is short credit exposure. To minimize the confusion, we use the terms credit protection seller and credit protection buyer throughout our discussion.

From the real world

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