Download or read book Capital Structure Arbitrage written by Claus Bajlum and published by . This book was released on 2007 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: When identifying relative value opportunities across credit and equity markets, the arbitrageur faces two major problems, namely positions based on model misspecification and mismeasured inputs. Using credit default swap data, this paper addresses both concerns in a convergence-type trading strategy. In spite of differences in assumptions governing default and calibration, we find the exact structural model linking the markets second to timely key inputs. Studying an equally-weighted portfolio of all relative value positions, the excess returns are insignificant when based on a traditional volatility from historical equity returns. However, relying on an implied volatility from equity options results in a substantial gain in strategy execution and highly significant excess returns - even when small gaps are exploited. The gain is largest in the speculative grade segment, and cannot be explained from systematic market risk factors. However, although the strategy may seem attractive at an aggregate level, positions on individual obligors can be very risky.

Download or read book How Profitable is Capital Structure Arbitrage written by Fan Yu and published by . This book was released on 2006 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the risk and return of the so-called capital structure arbitrage, which exploits the mispricing between a company's debt and equity. Specifically, a structural model connects a company's equity price with its credit default swap (CDS) spread. Based on the deviation of CDS market spreads from their theoretical counterparts, a convergence-type trading strategy is proposed and analyzed using 135,759 daily CDS spreads on 261 obligors. At the level of individual trades, the risk of the strategy arises when the arbitrageur shorts CDS and the market spread subsequently skyrockets, forcing the arbitrageur into early liquidation and engendering large losses. An equally-weighted portfolio of all trades produces Sharpe ratios similar to those of other fixed-income arbitrage strategies and hedge fund industry benchmarks. However, the monthly excess returns on this portfolio are not significantly correlated with either equity or bond market factors.

Download or read book Managing Hedge Fund Risk and Financing written by David P. Belmont and published by John Wiley & Sons. This book was released on 2011-09-13 with total page 400 pages. Available in PDF, EPUB and Kindle. Book excerpt: The ultimate guide to dealing with hedge fund risk in a post-Great Recession world Hedge funds have been faced with a variety of new challenges as a result of the ongoing financial crisis. The simultaneous collapse of major financial institutions that were their trading counterparties and service providers, fundamental and systemic increases in market volatility and illiquidity, and unrelenting demands from investors to redeem their hedge fund investments have conspired to make the climate for hedge funds extremely uncomfortable. As a result, many funds have failed or been forced to close due to poor performance. Managing Hedge Fund Risk and Financing: Adapting to a New Era brings together the many lessons learned from the recent crisis. Advising hedge fund managers and CFOs on how to manage the risk of their investment strategies and structure relationships to best insulate their firms and investors from the failures of financial counterparties, the book looks in detail at the various methodologies for managing hedge fund market, credit, and operational risks depending on the hedge fund's investment strategy. Also covering best practice ISDA, Prime Brokerage, Fee and Margin Lock Up, and including tips for Committed Facility lending contracts, the book includes everything you need to know to learn from the events of the past to inform your future hedge fund dealings. Shows how to manage hedge fund risk through the application of financial risk modelling and measurement techniques as well as the structuring of financial relationships with investors, regulators, creditors, and trading counterparties Written by a global finance expert, David Belmont, who worked closely with hedge fund clients during the crisis and experienced first hand what works Explains how to profit from the financial crisis In the wake of the Financial Crisis there have been calls for more stringent management of hedge fund risk, and this timely book offers comprehensive guidelines for CFOs looking to ensure world-class levels of corporate governance.

Download or read book Capital Structure Arbitrage written by K. Asante-Poku and published by . This book was released on 2006 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Capital Structure and Corporate Governance written by Lorenzo Sasso and published by Kluwer Law International B.V.. This book was released on 2013-08-01 with total page 248 pages. Available in PDF, EPUB and Kindle. Book excerpt: Despite a clear distinction in law between equity and debt, the results of such a categorization can be misleading. The growth of financial innovation in recent decades necessitates the allocation of control and cash-flow rights in a way that diverges from the classic understanding. Some of the financial instruments issued by companies, so-called hybrid instruments, fall into a grey area between debt and equity, forcing regulators to look beyond the legal form of an instrument to its practical substance. This innovative study, by emphasizing the agency relations and the property law claims embedded in the use of such unconventional instruments, analyses and discusses the governance regulation of hybrids in a way that is primarily functional, departing from more common approaches that focus on tax advantages and internal corporate control. The author assesses the role of hybrid instruments in the modern company, unveiling the costs and benefits of issuing these securities, recognizing and categorizing the different problem fields in which hybrids play an important role, and identifying legal and contracting solutions to governance and finance problems. The full-scale analysis compares the U.K. law dealing with hybrid instruments with the corresponding law of the most relevant U.S. jurisdictions in relation to company law. The following issues, among many others, are raised: decisions under uncertainty when the risks of opportunism of the parties is very high; contract incompleteness and ex post conflicts; protection of convertible bondholders in mergers and acquisitions and in assets disposal; use of convertible bonds to reorganise and restructure a firm; timing of the conversion and the issuer’s call option; majority-minority conflict in venture capital financing; duty of loyalty; fiduciary duties to preference shareholders; and financial contract design for controlling the board’s power in exit events. Throughout, the analysis includes discussion, comparison, and evaluation of statutory provisions, existing legal standards, and strategies for protection. It is unlikely that a more thorough or informative account exists of the complex regulatory problems created by hybrid financial instruments and of the different ways in which regulatory regimes have responded to the problems they raise. Because business parties in these jurisdictions have a lot of scope and a strong incentive to contract for their rights, this book will also be of uncommon practical value to corporate counsel and financial regulators as well as to interested academics.

Download or read book Risk and Return of Capital Structure Arbitrage with Credit Default Swap CDS written by Yuchen Luo and published by . This book was released on 2008 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study also contributes to the literature on information flows across markets by providing economically significant evidence that information flows from stock and options markets to CDS market.

Download or read book Capital Structure Arbitrage written by and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Capital Structure Arbitrage Revisited written by Marcin Wojtowicz and published by . This book was released on 2014 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study risk and return properties of capital structure arbitrage strategies aiming to profit from temporal mispricing between equity and credit default swaps (CDSs) of companies. We find that capital structure arbitrage provides an attractive annualized return of 24.35% on invested capital. The arbitrage returns are higher for lower rated companies and surprisingly they are also higher for more liquid companies with larger CDS trading volumes. We find that the number of open arbitrage trades can at times cluster and in our sample the concentration of trades occurs when they are most profitable, which highlights the issue of capital allocation. Constructing weekly return indices of capital structure arbitrage, we find that no more than 15% of the returns is explained by common risk factors.

Download or read book Understanding Arbitrage written by Randall Billingsley and published by Pearson Education. This book was released on 2005-10-05 with total page 243 pages. Available in PDF, EPUB and Kindle. Book excerpt: Arbitrage is central both to corporate risk management and to a wide range of investment strategies. Thousands of financial executives, managers, and sophisticated investors want to understand it, but most books on arbitrage are far too abstract and technical to serve their needs. Billingsley addresses this untapped market with the first accessible and realistic guide to the concepts and modern practice of arbitrage. It relies on intuition, not advanced math: readers will find basic algebra sufficient to understand it and begin using its methods. The author starts with a lucid introduction to the fundamentals of arbitrage, including the Laws of One Price and One Expected Return. Using realistic examples, he shows how to identify assets and portfolios ripe for exploitation: mispriced commodities, securities, misvalued currencies; interest rate differences; and more. You'll learn how to establish relative prices between underlying stock, puts, calls, and 'riskless' securities like Treasury bills -- and how these techniques support derivatives pricing and hedging. Billingsley then illuminates options pricing, the heart of modern risk management and financial engineering. He concludes with an accessible introduction to the Nobel-winning Modigliani-Miller theory, and its use in analyzing capital structure.

Download or read book Risky Sovereign Capital Structure written by Vilimir Yordanov and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider a risky country having bonds outstanding both in foreign hard currency (Eurobonds) and local soft currency (treasuries). This is done under an enhanced structural credit risk Merton style model. The liability side the sovereign balance sheet is composed of three tranches in increasing order of seniority: monetary base, domestic debt, and foreign debt. They represent contingent claims on the country assets with the monetary base being the equity tranche and the foreign debt with priority in payment being the super-senior tranche. The focus of the paper is on the consistency that must hold between their values. More specifically we try to investigate how the capital structure arbitrage works both in relative value terms and dynamically over the business cycle. For the purpose we stick to elaborating on practical trading strategies backed by comprehensive empirics. The results of the paper could be of interest to desks and funds specialized in fixed income research and strategy.

Download or read book The Fragile Capital Structure of Hedge Funds and the Limits to Arbitrage written by Xuewen Liu and published by . This book was released on 2014 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: During a financial crisis, when markets most need liquidity and arbitrage tradings, hedge funds often reduce their exposures and positions. The paper explains this phenomenon in light of coordination risk. We argue that the fragile nature of capital structure of hedge funds, combined with low market liquidity, introduces coordination risk to hedge fund's investors. Coordination risk effectively limits hedge funds' arbitrage capabilities. We present a model of hedge funds' optimal asset allocation with coordination risk. We show that hedge fund managers behave conservatively and even give up participating in the market when they factor coordination risk into their investment decisions. The model gives a new explanation to the limits to arbitrage. We also discuss other implications of the model.

Download or read book Credit Risk Pricing with Levy Processes Capital Structure Arbitrage written by and published by . This book was released on 2006 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Convertible Arbitrage written by Nick P. Calamos and published by John Wiley & Sons. This book was released on 2011-01-19 with total page 306 pages. Available in PDF, EPUB and Kindle. Book excerpt: Minimize risk and maximize profits with convertible arbitrage Convertible arbitrage involves purchasing a portfolio of convertible securities-generally convertible bonds-and hedging a portion of the equity risk by selling short the underlying common stock. This increasingly popular strategy, which is especially useful during times of market volatility, allows individuals to increase their returns while decreasing their risks. Convertible Arbitrage offers a thorough explanation of this unique investment strategy. Filled with in-depth insights from an expert in the field, this comprehensive guide explores a wide range of convertible topics. Readers will be introduced to a variety of models for convertible analysis, "the Greeks," as well as the full range of hedges, including titled and leveraged hedges, as well as swaps, nontraditional hedges, and option hedging. They will also gain a firm understanding of alternative convertible structures, the use of foreign convertibles in hedging, risk management at the portfolio level, and trading and hedging risks. Convertible Arbitrage eliminates any confusion by clearly differentiating convertible arbitrage strategy from other hedging techniques such as long-short equity, merger and acquisition arbitrage, and fixed-income arbitrage. Nick Calamos (Naperville, IL) oversees research and portfolio management for Calamos Asset Management, Inc. Since 1983 his experience has centered on convertible securities investment. He received his undergraduate degree in economics from Southern Illinois University and an MS in finance from Northern Illinois University.

Download or read book How Efficient are Credit Default Swap Markets An Empirical Study of Capital Structure Arbitrage Based on Structural Pricing Models written by Björn Imbierowicz and published by . This book was released on 2008 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the efficiency of the credit default swap (CDS) market via the profitability and risk of capital structure arbitrage strategies based on observed mispricing in the CDS market over the years 2002 to 2006. We find that the CDS market has been inefficient in our observation period although this inefficiency declined over time. For this purpose, we calculate CDS premiums by means of the CreditGrades (2002) model and the models of Leland and Toft (1996) and Zhou (2001) and apply those within a capital structure arbitrage context for a dataset covering more than 800,000 observations. Our results indicate that structural credit risk models can adequately replicate market spreads but still produce significant positive arbitrage returns within our strategy. This also holds when transaction costs are incorporated. Accounting for risk via the Sharpe ratio reveals that the CDS market was inefficient at the beginning of our sample period but became efficient in the years 2004/2005 consistent with soaring trading volumes and the introduction of CDS index trading at this time. We are also able to show that the mathematically more advanced Leland and Toft and Zhou models provide larger arbitrage returns within our strategy. Considering rating classes, the arbitrage returns increase as obligors become riskier, in line with standard investment theory.

Download or read book Legal System Arbitrage and the Theory of Multinational Finance written by Thomas H. Noe and published by . This book was released on 2003 with total page 81 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a new theory of multinational capital structure based on legal-system arbitrage: The optimal capital structure for the multinational minimizes the value of the ex post opportunism options created by the diverse legal systems under which the multinational operates. This theory explains the complex mix between parent and subsidiary financing observed in most multinationals, even in the absence of both tax differentials and private information. Optimal capital structures minimize the default premia associated with the multinational's overall financing package by equating the marginal enforceability of debt contracts in the host and headquarters countries. Consistent with extant empirical research, the analysis shows that multinational utilization of local financing will be positively related to the creditor-friendliness of the local legal system. Further, the model provides an explanation for the fact that multinationals do not simply obtain all their financing in the location featuring the most creditor-friendly legal regime. In addition, the model produces many new empirical predictions regarding issues such as the venue selected by the multinational for restructuring, the optimal allocation of capital within the multinational, and the impact of currency risk on credit spreads and financing policy.

Download or read book Legal System Arbitrage and Parent Subsidiary Capital Structures written by Suman Banerjee and published by . This book was released on 2018 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops a new theory of the capital structure of parent--subsidiary organizations based on legal-system arbitrage: The capital structure of parent--subsidiary organizations is chosen to minimize the agency costs generated by selective renegotiation of claims written on the component legal entities. We show that optimal mixes of parent--subsidiary level financing minimize the default premia associated with the organization's overall financing package by equating the marginal enforceability of debt contracts written at the parent and subsidiary level. The enforceability of creditor claims depends not only on the legal regime but also on the size of the debt claims and the liquidation value of the firm's assets. Small claims written under a weak creditor rights regime may be more enforceable than large claims written under a regime with strong creditor protection. Thus, all optimal mixes involve some borrowing at the subsidiary level even if the subsidiary legal regime features weaker creditor protection than the parent regime. However, the mix between parent and subsidiary financing tilts toward the regime that features stronger creditor protection.

Download or read book Risk and Return in Finance written by Irwin Friend and published by . This book was released on 1977 with total page 184 pages. Available in PDF, EPUB and Kindle. Book excerpt: