Caia Level 1

theta

realized volatility refers to the actual observed volatility or standard deviation of the underlying stock, whereas implied volatility refers to the standard deviation of returns based on the observed market option price

- Agents may underestimate the true costs of issuing convertible bonds - Agents of small firms may not have any other options than to issue convertible bonds - Potential conflict of interest between straight bond investors and shareholder regarding the volatility of corporate assets - Indirect equity issuance costs

- income (coupon payment - stock dividend + rebate - financing expenses) - capital gains/losses (gains on stock and bond - losses on stock and bond)

- interest rate risk - Equity and volatility risk - correlation risk - credit risk - legal risk - liquidity and crisis risk

vega

- long volatility fund - market -neutral volatility fund

Tail risk strategy

takes a long position in options of individual equities and a short position in a related index option

fixed -income arbitrage strategy

duration -neutral

inter -curve arbitrage refers to spread trades of bonds with identical maturities whereas intra -curve arbitrage refers to yield curve trades of bonds with different maturities

- interest rate risk - prepayment risk - credit risk spreads - interest rate volatility - liquidity

Equity market -neutral fund

investment strategies that over time consistently result in abnormal returns or higher return than predicted by market models such as the CAPM

- market efficiency test - predicting persistence of market anomalies - accounting accruals - price momentum - earnings momentum - net stock isuance - insider trading

- breadth - -> number of active trades - skill - -> measured by IC (information coefficient) as the correlation between actual realized and forecasted managerial return

to reduce tracking error

systematic risk

- short -bias - long/short - market -neutral

Funds of Funds (FOFs)

investable index

- Portfolios of single hedge -fund managers - Multi -strategy funds - One or more funds of hedge funds - Structured products whose underlying asset are hedge funds - Investable indices of firms holding many hedge funds - Replication products that offer similar returns to hedge funds using factor -based approaches or trading systems

15 -20

1 million

management fees of 2%

- lower incentive fees (they avoid second layer of fees) - fees in multi -strategy funds are based on aggregated returns - greater felxibility - greater transparency - real -time access to all positions

- acces to more fund manager - diversification of operational risk -

- FOFs retain the returns of liquidated funds in their track record - FOFs include investment returns from the date of the first investment - FOFs use actual weights

- compsite - conservative - diversified - market defensive - strategic

- composite: higher returns - diversified: higher returns - conservative: consistent return with low risk - market defensive: hedge market risk - strategic: higher returns

- both can be either deliverable or cash settlement contracts - both have zero value at the time an investors enters into a contract - futures are exchange traded - futures contracts have standardized contract sizes and termes - futures have no counterparty risk - futures are marked -to -market - futures are regulated by the government

term structure of forward prices

- transaction costs, taxes do not exist - Risk free rate is zero - underlying asset can be borrowed at no cost - underlying asset has no dividend yield, convenience yield, storage cost - underlying asset can be easily obtained