FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies
A convertible arbitrage fund holds 1,000 convertible bonds, each convertible into 20 shares. The bond delta is 0.60. To be delta neutral, how many shares should the fund sell short?
The fund should short 12,000 shares. The bonds convert into 20,000 shares in total, and a delta of 0.60 means the position moves like 60 percent of that, so 0.60 times 20,000 gives the delta-neutral short position of 12,000.
- A12,000Correct
- B20,000
- C8,000
- D33,333
Explanation
Shares underlying = 1,000 x 20 = 20,000. Hedge = delta x shares = 0.60 x 20,000 = 12,000. Selling 20,000 ignores delta (delta of 1), and 8,000 uses 1 minus delta. 33,333 divides by delta instead of multiplying.
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