Question

1. Explain the nature of convertible loan stock and the rationales for the company to issue it.                     

2. Explain the empirical evidence of contrarian strategy on market over-reaction in the context of weak and semi-strong form efficiency.        
3. Critically discuss the features of Funds of Funds and explain any other three (3) types of hedge fund strategies.                 

Answer 1

a. Convertible loan stock-refers to loans which may be converted into shares at a later date. The lender will receive interest for the duration of the loan .

Companies issue it since it gets the tax deduction of interest, which lowers the cost of capital for a company

B. The weak form suggests that today's stock prices reflect all the data of past prices and that no form of technical analysis can be effectively utilized to aid investors in making trading decisions

C. Funds of Funds-It is fund scheme that invests in other schemes of mutual funds depending upon objective of the investors.

Types of hedge strategies are:-

1. Long/Short Equity-buy stocks of companies that are expected to outperform while sell short stocks you expect to underperform.

2. Convertible Arbitrage-buy the convertible debt of a company and short-sells the stock of the same company.

3. Distressed Investing-purchase bank loans or high yield debt of companies that are facing potential bankruptcy or restructuring