CFA Practice Question

CFA Practice Question

An investor owns IBM stock, and believes it to be overpriced. However selling the stock would require the investor to pay short term capital gains. Tax considerations make it preferable to sell the stock next year, however the investor believes that the price next year will be lower. To meet both tax goals and belief about price changes, the investor could:
A. enter into an equity swap where he receives total return on IBM stock and pays LIBOR.
B. enter into an equity swap where he pays total return on IBM stock and receives LIBOR.
C. enter into an equity swap where he receives total return on IBM stock and also receives LIBOR.
Explanation: The investor should enter into an equity swap where he pays the total return of IBM stock, and receives LIBOR. That way, he has hedged his IBM position (reduced net exposure to zero) and also is receiving the LIBOR rate.

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