Clara's TSLA Trade Analysis
30 Questions
1 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What was the outcome of Clara's trade after monitoring it for several months?

  • She incurred a loss of $14.65.
  • She broke even on the trade.
  • She realized a profit of $14.65. (correct)
  • She recorded a loss on the convertible bond.

Which action did Clara take when she initiated her trade on July 7, 2017?

  • She bought both the TSLA stock and the convertible bond.
  • She only shorted the TSLA stock.
  • She shorted the TSLA stock and purchased the convertible bond. (correct)
  • She sold the convertible bond and shorted the stock.

What was the conversion price used to determine the number of shares Clara could acquire from the bond?

  • $870.38
  • $359.00 (correct)
  • $313.22
  • $1,061.10

How many total shares of TSLA stock did Clara short during her initial trade?

<p>2.7788 shares (C)</p> Signup and view all the answers

What was Clara's annualized return on the trade?

<p>3.13% (C)</p> Signup and view all the answers

What action will James take when the credit spread reaches above 100 basis points?

<p>He will initiate a trade. (C)</p> Signup and view all the answers

Which financial instrument is James monitoring based on the information provided?

<p>The RY bond (C)</p> Signup and view all the answers

What is the implication of a credit spread widening to above 100 basis points?

<p>Increased default risk perception (D)</p> Signup and view all the answers

How does James decide when to trade the RY bond?

<p>When the credit spread widens to above 100 basis points (C)</p> Signup and view all the answers

What does a credit spread refer to in the context of bonds?

<p>The difference in interest rates between two different securities (D)</p> Signup and view all the answers

In the provided data, what likely trend should James expect if the credit spread is monitored over time?

<p>Fluctuations indicating market volatility (D)</p> Signup and view all the answers

Why might a credit spread of above 100 basis points be significant for bond investors?

<p>It is commonly indicative of potential investment opportunities. (C)</p> Signup and view all the answers

What yield spread did James initially set for initiating the trade?

<p>100bps or more (D)</p> Signup and view all the answers

How many BoC bonds did James short for the trade?

<p>1,022 bonds (C)</p> Signup and view all the answers

What amount did James sell his RY position for during the trade reversal?

<p>$1,042,297 (D)</p> Signup and view all the answers

What was the profit percentage resulting from the round-trip trade?

<p>1.72% (D)</p> Signup and view all the answers

When did the yield spread reach the target for James to reverse the trade?

<p>June 10, 2019 (A)</p> Signup and view all the answers

What was the spread at the time James initiated the trade?

<p>102bps (C)</p> Signup and view all the answers

What was the total investment amount James used for the trade?

<p>$1,000,000 (D)</p> Signup and view all the answers

What was the annualized RoR calculated from the trade?

<p>3.45% (B)</p> Signup and view all the answers

What was the difference in the yield spread between the trade initiation and trade reversal?

<p>32bps (A)</p> Signup and view all the answers

What was the initial spread between the two U.S. Treasury bonds when Lydia initiated the trade?

<p>27 bps (C)</p> Signup and view all the answers

How many U.S. Treasury 10-year bonds did Lydia purchase with the proceeds of the short sale?

<p>1,053 bonds (D)</p> Signup and view all the answers

What was the total proceeds from selling the U.S. Treasury 10-year bond position during the reversal?

<p>US$1,051,947 (C)</p> Signup and view all the answers

What was the total profit Lydia made from the round-trip trade?

<p>US$40,963 (D)</p> Signup and view all the answers

What was the annualized Rate of Return (RoR) on Lydia's initial investment?

<p>8.08% (B)</p> Signup and view all the answers

On which date did Lydia reverse the trade when the spread fell to 5 bps?

<p>March 22, 2019 (D)</p> Signup and view all the answers

What actions were involved in the trade reversal after monitoring the yield curve?

<p>Selling U.S. Treasury 10-year bonds and buying U.S. Treasury 3-year bonds (D)</p> Signup and view all the answers

How much investor capital did Lydia allocate to initiate the trade?

<p>US$1,000,000 (C)</p> Signup and view all the answers

What was the number of U.S. Treasury 3-year bonds Lydia shorted initially?

<p>1,022 bonds (C)</p> Signup and view all the answers

Flashcards

Convertible Bond

A bond that can be exchanged for a specific number of the issuer's shares of stock.

Conversion Price

The price at which a convertible bond can be exchanged for company stock.

Shorting Stock

Selling borrowed stock with the intent to buy it back later at a lower price to make a profit.

Bond Reversal

Selling the bond and repurchasing the original stock after a trade; closing out a short trade.

Signup and view all the flashcards

Return on Investment (RoR)

A measure of profit or loss from an investment, often expressed as a percentage.

Signup and view all the flashcards

Credit Spread

The difference in yield between a bond issued by a specific company and a government bond with the same maturity. It reflects the additional risk associated with the company's bond.

Signup and view all the flashcards

Basis Point (bps)

A unit of measurement for interest rates and yield spreads, representing one hundredth of a percentage point. For example, 100 bps = 1%.

Signup and view all the flashcards

Yield to Maturity (YTM)

The total return an investor can expect on a bond if they hold it until maturity, taking into account interest payments and the difference between the purchase price and the face value.

Signup and view all the flashcards

What is the relationship between the yield to maturity and the price of a bond?

They have an inverse relationship: As YTM increases, the price of the bond decreases, and vice versa. This is because a higher YTM means investors are demanding a higher return for holding the bond, which drives the price down.

Signup and view all the flashcards

Why does James want to wait for the credit spread to widen to 100 bps?

James is likely looking for a buying opportunity. When the credit spread widens, it means the market is pricing in more risk for the company's bonds, making them cheaper. He wants to buy the bond at a lower price to potentially profit from the eventual narrowing of the spread.

Signup and view all the flashcards

Why should you consider both credit spread and YTM when investing?

Credit spread reflects the company's risk profile, while YTM tells you the potential return. To make informed decisions, consider both factors. Higher credit spread indicates more risk, but also potentially higher returns.

Signup and view all the flashcards

How can you monitor the credit spread?

Financial news sources such as Bloomberg provide real-time data on bond yields and credit spreads. Investors can also use online platforms for data monitoring.

Signup and view all the flashcards

Credit Spread Trade

A strategy that involves profiting from the difference in yield between two bonds with similar credit ratings.

Signup and view all the flashcards

Yield Spread

The difference in yield between two bonds, usually expressed in basis points (bps).

Signup and view all the flashcards

Shorting a Bond

Selling a bond that you don't own, with the expectation of buying it back at a lower price later.

Signup and view all the flashcards

Initiating a Credit Spread Trade

The act of entering a credit spread trade by simultaneously short selling one bond and buying a similar bond with a higher yield.

Signup and view all the flashcards

Target Reversal Price Spread

The yield spread at which the credit spread trade is reversed.

Signup and view all the flashcards

Reversing a Credit Spread Trade

The act of closing out a credit spread trade by simultaneously buying back the shorted bond and selling the bond that was purchased.

Signup and view all the flashcards

Annualized RoR

The annualized return on investment, which reflects the investment's growth per year.

Signup and view all the flashcards

What are two simultaneous actions involved in initiating a credit spread trade?

Shorting a specific amount of the lower-yielding bond and purchasing an equivalent amount of the higher-yielding bond using the proceeds.

Signup and view all the flashcards

Yield Curve Flattening

A scenario where the difference in yields between short-term and long-term bonds decreases.

Signup and view all the flashcards

Spread

The difference in yields between two bonds.

Signup and view all the flashcards

Short Selling

Borrowing and selling a security with the expectation of buying it back later at a lower price to make a profit.

Signup and view all the flashcards

Trade Initiation

The initial action of entering a trade, often involving both buying and selling of securities.

Signup and view all the flashcards

Trade Reversal

Exiting a trade by reversing the initial actions, often involving selling and buying of securities.

Signup and view all the flashcards

Round-trip Trade

A trade where the initial actions are reversed to close out the position, resulting in an overall profit or loss.

Signup and view all the flashcards

Profit from Yield Curve Flattening

The profit generated from a trade that benefits from a decrease in the spread between short-term and long-term bond yields.

Signup and view all the flashcards

Study Notes

Alternative Investments: Strategies and Performance

  • In this chapter, students will learn about alternative investment strategies and performance measurement tools.
  • A comprehensive due diligence process and the suitability of alternative strategies will also be discussed.

Learning Objectives

  • Explain the various types of alternative strategies, including relative value, event-driven, and directional strategies.
  • Identify strategies most frequently used in alternative mutual funds.
  • Discuss risk measures and risk-adjusted return measures for alternative strategy fund investments.
  • Discuss benchmarking of alternative investment performance.
  • Describe the due diligence process when considering alternative strategy fund investment.
  • Identify investor groups for whom liquid alternative investments are most suitable.

Key Terms

  • absolute risk
  • convertible arbitrage strategy
  • directional strategies
  • distressed security strategy
  • emerging markets alternative funds
  • equity market-neutral strategy
  • event-driven strategies
  • fixed-income arbitrage strategy
  • global macro strategy
  • high-yield bond strategy
  • kurtosis
  • maximum drawdown
  • merger strategy
  • relative value strategies
  • risk arbitrage strategy
  • short bias strategy
  • long/short equity strategy
  • skew
  • time to recovery

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

CSC Volume 2 Section 3 Alternative Investments PDF

Description

Test your knowledge on Clara's TSLA trade by answering questions about her actions and outcomes. This quiz covers key details such as trade initiation, conversion prices, and annualized returns. Perfect for those interested in stock market strategies and trading analytics.

More Like This

TSLA
7 questions

TSLA

ProminentGladiolus avatar
ProminentGladiolus
Use Quizgecko on...
Browser
Open
Browser
Browser