1.Identify the risks in a convertible arbitrage strategy that takes long positions in convertible bonds hedged with short positions in treasuries and the underlying stock.
　　A. short implied volatility
　　B. long duration
　　C. long stock delta
　　D. positive gamma
　　2.A pool of high yield bonds is placed in an SPV and three tranches (including the equity tranche) of bonds are issued collateralized by the bonds to create a Collateralized Bond Obligation (CBO). Which of the following is true?
　　A. At fair value, the value of the issued bonds should be less than the collateral
　　B. At fair value, the total default probability， weighted by size of issue, of the issued bonds should equal the default probability of the collateral pool
　　C. The equity tranche of the CBO has the least risk of default
　　D. The yield on the low risk tranche must be greater than the yield on the collateral pool
　　3.Immunization is the process of offsetting the effects of interest-rate changes on the value of assets and liabilities. Coverage of liabilities with significant convexity may be more effectively matched with a:
　　A. Bullet portfolio with little convexity.
　　B. Callable bond portfolio, especially in a declining-ratc environment.
　　C. Mortgage portfolio, especially in a highly volatile rate environment.
　　D. Barbell portfolio with positive convexity.
　　Answer:
　　1.D
　　This position is hedged against interest rate risk, so B is wrong. It is also hedged against directional movements in the stock, so C is wrong. The position is long an option (option to convert the bond into the stock) and so is long implied volatility, so A is wrong. Long options positions have positive gamma.
　　2.B
　　A Collateralized Bond Obligation and the underlying securities must have equal market value, similar cash flow pattern and identical risk, which eliminate choice A in favor of B. The equity tranche has the greatest risk of default; the yield on the low risk tranche must be less than the yield on the collateral pool.
　　3.D
　　Barbell portfolios usually contain substantial convexity, which can be used to offset changes in liabilities not met with duration matches.