As the manager of a medium-sized hedge fund, the recent fluctuations in the capital markets have attracted your attention. In particular, the prices of stocks and bonds have now dropped to what you consider to be unprecedentedly attractive levels. Although you expect the prices of these investments to rise in the near future, your hedge fund is currently cash-constrained due to an unforeseen redemption wave; "fire-selling" the best holdings in your portfolio is not a practical way to generate investable funds. Further, the next round of incoming cash flows from new investor subscriptions and from the existing investments are not expected to occur for approximately three months.
a. Briefly explain the details of two investment strategies that employ derivative instruments that would allow you to take advantage of the anticipated market rally.
b. What are the benefits and potential risk factors for undertaking these derivative strategies in lieu of direct cash-oriented investments?