CFA Level I · CFA Level I Exam · Hedge Funds
Compared with merger arbitrage, a distressed securities strategy is most likely to involve:
A distressed securities strategy most likely buys securities of firms in or near bankruptcy at a deep discount to expected recovery value. Unlike merger arbitrage, which earns narrow spreads on announced deals, it takes on substantial credit risk and often a long holding period.
- Abuying securities of firms in or near bankruptcy, often at a deep discount to expected recovery valueCorrect
- Bearning a narrow spread with a high probability of success on announced transactions
- Cholding offsetting long and short positions to eliminate exposure to credit risk
Explanation
Distressed strategies buy debt or equity of troubled firms at deep discounts, hoping for recovery through restructuring. Narrow spreads on announced deals describe merger arbitrage, and distressed investing keeps substantial credit exposure.
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