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NEW QUESTION: 1
Section B (2 Mark)
A hedge fund manager purchases 10 convertible bonds with a par value of $1,000, a coupon of 7.5%, and a market price of $900. The conversion ratio for the bonds is 20. The conversion ratio is based on the current price of the underlying stock, $45, and the current price of the convertible bond. The delta, or hedge ratio, for the bonds is 0.4.
Therefore, to hedge the equity exposure in the convertible bond, the hedge fund manager must short the following shares of underlying stock:
A. 0
B. 1
C. 2
D. 3
Answer: C

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