2011 l3 sample exam v1 2 qa

2011 CFA Level 3 Sample Exam SS6: Capital Market Expectation in Portfolio Management Q7-12: Rogers Case Scenario Ted Rogers, CFA, is the director of a research team that analyzes traditi

Trang 1

Volume 1 with Answers and Explanations Volume 2 with Answers and Explanations

www.VividBook.org VividBookNet@Gmail.com

25 March 2011

Trang 2

2011 CFA Level 3 Sample Exam

2011 Level 3 Sample Exam Volume 1

Questions

SS1/2: Code of Ethics and Professional Standards

Q1-6: Kim Tang Case Scenario

Kim Tang, CFA, a consultant for a Sovereign Wealth Fund, is reviewing a hedge fund, Clean Tech Research Management (CRM).CRM is owned by the original three hedge funds’ founders and invests in “clean technology” companies CRM adopted the CFA Institute Code of Ethics and Professional Standards

Tang examines the various forms of advertising that CRM uses The firm is aggressively seeking new clients by using media outlets ranging from blogs and test messages to

webinars to promote its business In one of its advertising messages CRM states,” We have a very experienced research team and are proud that they all are CFAs.”

In reviewing CRM'’s marketing brochure, Tang reads the following statements:

Statement 1:

“Clean technology companies share prices have increased recently due to the growing awareness of climate change issues and the rising cost of energy It is our opinion that

returns in this area will continue to be above average for several years In fact, out

proprietary investment analysis software, which we also use to manage our portfolios, has determined that investments in green transportation companies will double in

value in the next six months, In the clean energy area we expect to earn a 200 percent

return over the next year on one of our solar power company investments based upon sales projections we prepared assuming that last year’s generous tax incentives stay

in place.”*

Statement2:

“The CRM fund invests in publicly traded and highly liquid companies and is

recommended only for investors who seek returns from breakthrough technology and

are able to assume a high level of risk One of the "green energy” companies that we recently invested in ,EnergyAlgae(EA), partnered with a global energy firm last year to create oil from algae EA’s market capitalization rose to over $2 billion from $500

million immediately after this deal was announced, benefiting the fund Another

company CRM invested in, Plastic40il (P40), just patented a waste plastic-to-oil

process that produces oil at less than $30 per barrel One of the founders of CRM is on

the board of P40 and his information on the companies patent process let us purchase

stock in P40 before the patent became widely publicized.”*

Trang 3

*Information supporting the statements made in this communication is available upon request

When Tang asks CRM’s founders for supporting documents related to Statement 2, she is told that this information was based upon third-party research from a brokerage firm that,

in addition to conducting the research, also maintains all necessary records, In addition,

Tang also learns that CRM is a majority shareholder of this brokerage firm, which brought both EA and P40 public Additionally, CRM’s analysts inform Tang they did not need to look at the quality of this third-party research because one of their former colleagues recently left CRM and established the research department in this brokerage firm

In researching EA and P40, Tang finds that potential customers and suppliers of both EA

and P40 are highly skeptical of the claims made regarding these companies’ respective products She also contacts several major and minor energy companies and is unable to

locate anyone who has even heard of EA When Tang reviews CRM’s trading activity in

EA and P40 shares, she finds that CRM liquidated its position in EA and P40 soon after CRM's portfolio managers positively mentioned EA and P40 in a number of media interviews In addition, many of CRM’s employees also sold their shares.in EA and P40 immediately after CRM sold its shares of EA and P40 Share prices of EA and P40 both

dropped dramatically after the stock sales made by CRM and it employees

Question 1

Should Tang inform CRM’s founders that they are in violation of CFA Institute Standards with respect to referencing the CFA designation in their advertising?

A No

B Yes, because the CFA designation must be used as an adjective

C Yes, because the CFA designation should be used with the CFA certification mark

Question 2

In Statement 1, the founders of CRM are least likely to have violated the CFA Institute

Standards of Professional Conduct with regard to their;

A investment analysis software

B solar power company investment

C investments in clean technology companies

Trang 4

Question 4

With respect to the relationship between CRM and the brokerage fim, which of the

following should the founders of CRM not do to be in compliance with CFA Institute

Standards of Professional Conduct?

A Perform due diligence on the research firm

B Obtain the research information from an independent firm

C Maintain a record of the third-party research used in their analysis

Question 5

Tang’s most appropriate course of action concerning the relationship between CRM and the brokerage firm, is to recommend that CRM;

A sever the relationship immediately

B communicate relevant information to all clients

C explain the arrangement to the Sovereign Wealth Fund

Question 6

The trades cenceming EA and P40 are least likely to have victated the CFA Institute

Standards of Professional Conduct because:

A of the order of priority in which these two stocks were traded

B both CRM’s and employees’ trades distorted prices for the stocks

C recommendations for these two stocks did not have an adequate basis.

Trang 5

SS6: Capital Market Expectation in Portfolio Management

Q7-12: Rogers Case Scenario

Ted Rogers, CFA, is the director of a research team that analyzes traditional and

nontraditional sources of energy for investment purposes For traditional energy sources,

a number of high-frequency historical data series are available For nontraditional energy sources, the data are generally quarterly and tend to hide a great deal of the volatility that Rogers knows to exist because appraised values are used instead of market values To supplement the quarterly data, Rogers’ team uses an index of the top thirty firms in new and experimental technologies, called the NEXT index While not all of the firms in the NEXT are energy firms, the index is available as a weekly series However, the NEXT does change its composite mix of firms frequently as firms in the index fail or are sold to larger firms that are not in the index

To determine the correlation matrix within the different energy sectors, Rogers’ team relies

on a weighted average of correlations derived from multifactor models and historical correlations Although the combined experience within the team favors emphasizing the correlations derived from ihe multifactor models, historical correlations are given a greater

~ weight within the weighted average calculations to lower the future expected performance

estimates of different investment models being considered This practice of purposefully

understating the expected future performance of these investment models is viewed as a

safety measure by the team and as a way to manage client expectations

In a recent meeting, the team discussed how using the last two years of historical data for

oil-related industries generated relationships between factors that had not existed in the past One member of the team, Steve Phillops, stated;

“ The relationships reflect the fact that hurricane activity in the last two years has

impacted oil concerns worldwide There is no reason to believe that such relationships

will continue in the future.”

Most of the team agree with Philips, but conceded that a number of clients specifically

requested analysis of the previous two years of data with an expectation that new trends

were emerging within the industry The team decided to add more variables to the analysis

to show that the relationships the team believed to be significant actually outweighed the

importance of these recently found relationships After adding several additional variables,

the team found that the model did not improve in predictive ability, but the recently found

relationships were indeed no longer significant

Question 7

The date available for nontraditional energy sources are best described as date with:

A smocthing

B a time-period bias.

Trang 6

Which of the following psychological traps best describes Rogers’ team’s decision to

give historical correlation more weight in the correlation matrix?

Trang 7

SS8: Asset Allocation

Q13-18: Jerold Munoz Case Scenario

Jerold Munoz is a wealthy U.S investor whose current portfolio consists entirely of U.S equities He has read that there are benefits and risks associated with international

diversification and is interested in learning more about these He contacts Mei-li Chen, CFA, an investment advisor who specializes in international investments for U.S.- based investor Munoz provides Chen with information about his current portfolio and asks her to

show him how an allocation of international securities could benefit his portfolio

When they meet, Chen tells Munoz;” Your current all- domestic equity portfolio has a standard deviation of 10.4 percent | have constructed a well-diversified portfolio of

international stocks and bonds with the same expected return and standard deviation as

your domestic portfolio This portfolio has a correlation of 0.5 with your current all-domestic portfolio Allocating 30 percent of your investments to this portfolio of foreign

stocks and bonds will not affect your expected return but will substantially reduce your

portfolio risk.”

Munoz says that he has read a number of things about currency risk that he isn’t sure

about, including:

Statement1: Currency risk is difficult to eliminate

Statement2: Currency risk should be netted across all portfolios

Statement2: Currency risk tends to be smaller over longer horizons

He asks Chen to verify these statements He also asks Chen for an example of how currency risk and market risk interact Chen explains that, from the perspective of a U.S

investor like Munoz, the risk of a foreign stock investment depends on the market risk of international stock in local currency, the risk of the exchange rate of the stock’s currency relative to the U.S dollar, and the correlation between the two She provides an example

in which the market risk is 9 percent, the exchange rate risk is 6 percent, and the

correlation is 0.4

Munoz tells Chen that he understands that low correlations are the key to effective international diversification, but asks her whether he should hedge currency risk when he

makes investments in international stocks and bonds Chen replies that it doesn't really

matter from a portfolio risk perspective, because there is little difference between the correlations when comparing hedged and unhedged returns

After the have talked extensively, Chen recommends that Munoz change his focus from

international diversification to global investing She explains that such a change in focus will alter Munoz’s analysis, causing him to place more emphasis on some factors and less

emphasis on others

Finally, Munoz asks Chen to comment about the benefits and risks associated with

6

Trang 8

emerging markets Chen says that expected retums and risks are generally higher in

emerging markets than in developed countries She also points out that the factors related

to portfolio risk, such as the way correlations change during periods of increased volatility

and the correlation relationship between market returns and exchange rates, behave in the same qualitative ways for both types of markets

Question13

Assuming Munoz reallocates 30 percent of his current U.S equity portfolio to the

international portfolio Chen recommends, the standard deviation of the portfolio will be closest to:

A 5.20%

B 8.61%

C 9.24%

Question 14

Of the 3 statements Munoz makes about makes about currency risk, Chen shouid be

least likely to agree with:

A Statement 1

B Statement 2

C Statement 3

Question 15

From Munoz’s perspective, the contribution of currency risk to the international stock

investment in Chen's example is closest to:

B Incorrect with regard to bond markets

C Incorrect with regard to stock markets

Trang 9

C Individual company

Question18

What part of Chen’s statement about emerging markets is least likely correct?

A Correlations between market returns and exchange rates

B Changes in correlations when market returns are volatile

C Level of risk in emerging markets relative to developed countries

Trang 10

SS10: Portfolio Management of Global Bonds and Fixed Income Derivatives

Q19-24: Berg Case Scenario

Alpha Consultants is working with the Swedish-based Berg Pension Fund to select a

fixed-income firm to manage a €100 million global bond portfolio Delta Mangers, LLP is the third and final presenter to Berg’s investment committee After going through its investment philosophy and process, Delta addresses several questions,

Alpha expresses concern about the use of leverage in the portfolio Delta has indicated that by employing 100 percent leverage, it can generate incremental returns and Delta provides the committee with the data in Exhibit 1

Exhibit 2

Futures Market Data

Conversion Factor 1.15

Duration of Cheapest to Deliver Bond 5.2

Price of Cheapest to Deliver Bond €98,000

Delta responds with the following statement:

“International interest rates are not perfectly correlated In fact, since this is a global bond portfolio, 60 percent of the portfolio is from U.K issuers and has duration of 7 and the remainder is from German issuers with average duration of 4.5 years, both

before any hedging activities, to meet Berg's duration target Historically the

country beta between the U.K and Germany is 0.55.”

Berg then asks Delta to make a recommendation as to whether the portfolio should be hedged back to its domestic currency, the Swedish Kronor Delta responds that actively

managing currency risk is an expected source of incremental returns for the portfolio and has historically accounted for 25 percent of Berg's outperformance Berg refers to the data

in Exhibit 3 to support its current view that currency exposure in the portfolio should be

Ụ

Trang 11

2011 CFA Level 3 Samp!e Exam

Currency Market Data

Delta forecast spot rate in 6 months 10.80 9.61 -

Berg then asks whether a global portfolio would benefit from the inclusion of emerging

market debt Delta responds that returns can be attractive in emerging markets during

certain periods, but that risks also abound and notes the following:

Risk 1: Returns are frequently characterized by positive skewness as the

potential large downside is offset by a comparable upside

Risk 2: If a default of sovereign debt occurs, recovery against sovereign states

can be very difficult

Risk 3: The frequency of default and ratings transition is significantly higher

than that of developed market corporate bonds with similar ratings

At the conclusion of the presentation Alpha and Berg convene to discuss which of the

three managers who presented should be selected for the €100 million mandate Alpha

advises Berg that the following criteria are important when evaluating fixed-income portfolio managers:

Criteria 1: Style analysis will enable us to understand the active risks relative to

the benchmark that the manager has taken, and which biases have

consistently added to performance

Criteria 2: Historical performance is a primary consideration in selecting a

manager because good managers persistently outperform over time

Criteria 3: We could select two of the three managers who presented if our

analysis shows that the correlations of alpha between them are low

Trang 12

Based on Delta’s statement regarding international interest rates, the impact of a 100

basis point change in U.K interest rates on portfolio return is closest to :

A Euro bonds into GBP

B Sterling bonds into Euro

C Portfolio to the base currency, Kronor

Which of the criteria outlined by Alpha is least accurate with respect to the selection of a

fixed income manager?

A Criteria 1

B Criteria 2

C Criteria 3

Trang 13

SS14: Risk Management

Q25-30: Karin Larsson Case Scenario

Karin Larsson is a new employee in the risk management group at Baltic Investment Management, Inc Her co-worker, Sten Reinfeldt, is good resource for any risk management information she may require or questions she may have

Larsson and Reinfeldt discuss the importance of risk management for increasingly _complex investment management firms and investment portfolios During this discussion, Larsson makes the following comments about risk management

Comment: Risk governance is a business process system that puts risk

management into practice

Comment: Risk management is a process that identifies and continuously

measures exposures to risk

Comments: Enterprise risk management is based on the consideration of

each risk factor within the corporate governance structure

Baltic has a number of portfolios under management that use derivative instruments Reinfeldt tells Larsson that derivatives can expose the firm to both financial and nonfinancial risks Larsson mentions that she has a good understanding of the financial

risks associated with derivatives, but not the nonfinancial ones Reinfeldt responds by

listing several nonfinancial risks and suggests that Larsson review them carefully

One of Baltic’s portfolios, the PGP Fund, holds only derivative instruments and has a monthly value at risk (VAR) of SEK 10 million at a probability of 0.05 Larsson asks

Reinfeldt to explain the VAR of the PGP Fund to her

Baltic has a fixed-income trading desk and an equity trading desk The two trading desks

are allocated specific levels of risk and engage in activities that have low correlations with

each other Both desks are permitted a daily VAR of SEK 10 million The fixed income desk is allocated capital of SEK 100 million and makes an average monthly profit of SEK

15 million The equity desk is allocated capital of SEK 200 million and makes an average

monthly profit of SEK 25 million

Reinfeldt comments that the risk management group has adopted stress testing to make

up for some of the limitations of VAR analysis He lists some of these limitations for Larsson:

Limitation 1: Different VAR estimation methods can produce substantially

different values

Limitation 2: VAR for individual positions does not generally aggregate in a

Trang 14

simple way to portfolio VAR

Limitation 3: VAR incorporates positive outcomes into risk profile, reducing

the impact of negative outcomes

Larsson focuses on a derivative portfolio, the KP Fund, that contains a number of

over-the-counter (OTC) derivative contracts She asks Reinfeldt how Baltic manages its

counterparty credit risk Reinfeldt responds, “There are a number of ways we manage counterparty credit risk We periodically mark to market all OTC derivatives contracts In addition, we use credit default swaps to reduce credit risk.”

With regard to the PGP fund, what is the most accurate response that Reinfeldt can

provide Larsson? There is a 5 percent probability that in a month, the portfolio’s loss will be;

A equal to SEK10,000,000

B atleast SEK 10,000,000

C no more than SEK 10,000,000

Question 28

With regard to the fixed-income and equity trading desks, which of the following

statements is most likely accurate?

A The trading desks have the same risk budgets

B The fixed-income desk generates better returns on the allocation of VAR and capital

C The combined daily VAR of the trading desks is less than SEK 20 million

Question 29

Which of the limitations of VAR analysis that Reinfeldt lists for Larsson is least likely

Trang 15

B No, he is incorrect about marking to market

C No, he is incorrect about credit default swaps

Trang 16

2011 Level 3 Sample Exam Volume 1

Answers

1 Correct answer: B

2011 Modular Level III, Vol.1,p.145 Study Session 1-2-a

Demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situations involving issues of professional integrity

The CFA designation must always be used as an adjective; e.g., the entire research team

is made up of CFA charterholders

2 Correct answer: C

2011 Modular Level Ill, Vol.1, pp 115-116 Study Session 1-2-a

Demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situations involving issues of professional integrity

Fact has been clearly indentified and separated from opinion

3 Correct answer: A

2011 Modular Level III, Vol.1, pp 36,47,77 Study Session 1-2-a

Demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various professional integrity

Standard III(C), Duties to Clients (Suitability),does not appear to have been violated as the fund is characterized as the fund is characterized as a high-risk investment

4 Correct answer: B

2011 Modular Level Ill, Vol.1, pp 107-109,119-120 Study Session 1-2-b

Recommend practices and procedures designed to prevent violations of the Code of

Ethics and Standards of Professional Conduct

There is no requirement that the research has to be obtained from an independent

third-party research organization However, there is an obligation that third-party research

may be relied upon only when a reasonable and diligent effort has been made to

determine that the research is sound, and in this case the research does not appear to have been performed

5 Correct answer: B

2011 Modular Level Ill, Vol.1, pp 25,114-115 Study Session 1-2-b

{5

Trang 17

Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct

Full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity must be made to all clients In this case, the controlling position in the broker, who has underwritten two stocks the hedge fund holds and whose

recommendations the fund relied upon to make these investments, must be disclosed to all clients so that they may be better able to judge motives and possible biases for themselves

6 Correct answer: B

2011 Modular Level Ill, Vol.1, pp 57, 107, 129 Study Session 1-2-a

Demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situations involving issues of

professional integrity

Even though the hedge fund had priority in trading these two stocks, ahead of employees, that does not aileviate the stock price manipulation that was engaged in by the fund and its employees

7 Correct answer: A

2011 Modular Level III, Vol 3, pp.15-16 Study Session 6-23-b

Discuss, in relation to capital market expectations, the limitations of economic date, data measurement errors and biases, the limitations of historical estimates, ex post risk as a biased measure of ex ante risk, biases in analysts’ methods, the failure to account for conditioning information, the misinterpretation of correlations, psychological traps, and

model uncertainty

Smoothed or appraisal data are when appraised values are used instead of market values

This tends to make correlation magnitudes smaller and underestimate volatility

8 Correct answer: A

2011 Modular Level III, Vol 3, p.15 Study Session 6-23-b

Discuss, in relation to capital market expectations, the limitations of economic data, data

measurement errors and biases, the limitations of historical estimates, ex post risk as a

biased measure of ex ante risk, biases in analysts’ methods, the failure to account for conditioning information, the misinterpretation of correlations, psychological traps, and model uncertainty

Survivorship bias is when a data series reflects only companies that exist at a given

moment in time and not companies that may left prior to given moment in time (i.e., only

the surviving firms are in the data) The NEXT index has survivorship bias as evidenced

by the frequent change in its component firms due to failure and acquisition by larger

non-index firms

16

Trang 18

9 Correct answer: B

2011 Modular Level Ill, Vol 3, p 27 Study Session 6-23-b

measurement errors and biases, the limitations of historical estimates, ex post risk as a biased measure of ex ante risk, biases in analysts’ methods, the failure to account for

conditioning information, the misinterpretation of correlations, psychological traps, and model uncertainty

To determine the correlation matrix within the different energy sectors, Rogers’ team relies

on a weighted average of correlations derived from multifactor models and historical correlations A shrinkage estimator is a weighted average of correlation (or covariance) matrices created from at least two different correlation (or covariance) matrices generated form different sources

10 Correct answer: A

2011 Modular Level Ill, Vol 3, pp 22-23 Study Session 6-23-b

Discuss, in relation to capital market expectations, the limitations of economic data, data measurement errors and biases, the limitations of historical estimates, ex post risk as a biased measure of ex ante risk, biases in analysts’ methods, the failure to account for conditioning information, the misinterpretation of correlations, psychological traps, and

model uncertainty

Rogers’ team views giving more weight to the historical correlations as a safety measure,

and as a way to manage client expectations The prudence trap is a tendency to be overly cautious in forecasts due to potentially damaging results from being incorrect

11 Correct answer: B

2011 Modular Level Ill, Vol 3, p.19 Study Session 6-23-b

Discuss, in relation to capital market expectations, the limitations of economic data, data measurement errors and biases, the limitations of historical estimates, ex post risk as a

biased measure of ex ante risk, biases in analysts’ methods, the failure to account for

conditioning information, the misinterpretation of correlations, psychological traps, and

model uncertainty

Phillips believes the impact of hurricane activity will not necessarily continue in the future

A time-period bias occurs when particular relationships or sensitivities occur only during a particular period of time

2011 Modular Level Ill, Vol 3,:p 19 Study Session 6-23-b

measurement errors and biases, the limitations of historical estimates, ex post risk as a biased measure of ex ante risk, biases in analysts’ methods, the failure to account for

Trang 19

conditioning information, the misinterpretation of correlations, psychological traps, and

model uncertainty

A data-mining bias occurs when variables are added to an analysis without any predictive

merit (i.e., there is no causal relationship for adding the variables) In this case, the

variables are not added to enhance prediction, but to thwart the predictive relationship between other variables

13 Correct answer: C

“The Case for International Diversification,” Bruno Solnik and Dennis McLeavey, CFA

Evaluate the implications of international diversification for domestic equity and fixed-income portfolios, based on the traditional assumptions of low correlations across

2011 Modular Level Ill, Vol.3, pp 336-367, Study Session 8-27-f

Explain why currency risk should not be a significant barrier to international investment

The currency risk of an investment may be hedged by shorting futures or forward

contracts, buying put currency options, or borrowing foreign currency to finance the

investment

2011 Modular Level Ill, Vol.3, pp 351-353 Study Session 8-27-c

Evaluate the contribution of currency risk to the volatility of an international security

The risk of the international investment is is ` ` where ø isthe risk

of the stock in its local currency , 9 ,is the standard deviation of the exchange rate, and pis the correlation between the correlation between the two In this case,

Trang 20

2011 Modular Level Ill, Vol.3, pp 353-358 Study Session 8-27-d

Explain and justify the impact of international diversification on the efficient frontier

There are substantial differences between the U.S./foreign bond market return

correlations for hedged and unhedged returns

2011 Modular Level Ill, Vol.3, pp 377-380 Study Session 8-27-i

Distinguish between global investing and international diversification and discuss the growing importance of global industry factors as a determinant of risk and performance

Global investing focuses more on competition of firms within industries across national

boundaries, not where a firm happens to be headquartered

2011 Modular Level Ill, Vol.3, pp 380-384 Study Session 8-27-j

Summarize the basic case for investment in emerging markets, as well as the risks and

restrictions often associated with such investments

Correlations between emerging market returns and exchange rates are usually high and positive, while for developed countries they are much lower and sometimes negative

19 Correct answer: c

2011 Modular Level Ill, Vol.4, pp.107-109 Study Session 10-30-a

Evaluate the effects of leverage on portfolio duration and investment returns,

Delta plans to leverage the €100 million portfolio by 100% by borrowing an additional €100

million

De= DeA- Dil

E De= 6.00(200) — 1.60(100) =ll

100

2011 Modular Level III, Vol.4, pp.114-118 Study Session 10-30-d

Demonstrate the advantages of using futures instead of cash market instruments to alter portfolio risk

To hedge against rising rates, Delta needs to reduce duration by selling the following

number of Treasury futures contracts:

Trang 21

(4.00 ~ 6.00) x 200,000,000 KLIS oe x 1,15 8 ~ 902.669 ~ 400,000,000

2011 Modular Level Ill, Vol.4, pp.131-132 Study Session 10-30-i

Evaluate (1) the change in value for a foreign bond when domestic interest rates changes and (2) the bond’s contribution to duration in a domestic portfolio given the duration of the foreign bond and the country beta

The U.K component contributes 4.2 in duration to the portfolio (0.60x7=4.2) Therefore, a

100 basis point change would contribute +/-4.20% to the value of the portfolio The

German component has duration of 1.8 (0.4x4.5=1.8) but moves only 0.55 times the

movement in U.K rates, therefore contributing +/-0.99% to portfolio return

(1.8X0.55=0.99)

2011 Modular Level Ili, Vol.4, pp.132-137 Study Session 10-39-j

Interest rate parity holds versus the GBP:

Recommend and justify whether to hedge or not hedge currency risk in an international

The forward rates for both Sterling and Euro fully reflect the interest rate differentials as

expected by interest rate parity As such, forwards reflect that both currencies are

expected to depreciate relative to the Kronor Delta's view, however, is that the GBP will

depreciate less than the forward implies and less than the Euro The result in actively

managing the portfolio is that the Euro bonds should be hedged in GBP

Interest rate parity holds versus the GBP:

f= (10.72-10.86)/10.86=-0.01289=-1.3%

Based on expected spot rates (10.8-10.86)/10.86=-0.00552=-0.552%

Interest rate parity holds versus the Euro:

f= (9.57-9.72)/9.72=-0.0154

Based on expected spot rates, (9.61-9.72)/9.72=-0.0113=-1.13%

2011 Modular Level Ill, Vol.4, pp.139-141, 146 Study Session 10-30-I

Discuss the advantages and risks of investing in emerging market debt

Emerging market debt returns are characterized by significant negative skewness,

2011 Modular Level III, Vol.4, pp.141-145 Study Session 10-30-m

Discuss the criteria for selecting a fixed-income manager.

Trang 22

Over tong periods of time, after factoring in fund fees and expenses, the realized alpha of fixed-income managers has averaged very close to zero and little evidence of persistence

exists

Compare and contrast the main features of the risk management process, risk

governance, risk reduction, and an enterprise risk management system

Enterprise risk management (ERM) is a type of risk governance structure that provides an

overall picture of the company’s risk position The corporate governance structure is much

broader than risk governance and encompasses the system of internal controls and

procedures used to manage individual companies :

2011 Modular Level Ill, Vol.5, pp 218-227 Study Session 14-39-b

Recommend and justify the risk exposures an analyst should report as part of an

enterprise risk management system

Liquidity is a financial risk Reinfeldt provides Larsson with a list of non-financial risks

2011 Modular Level III, Vol.5, pp.231-232 Study Session 14-39-e

Interpret and compute value at risk (VAR) and explain its role in measuring overall and

individual position market risk

VAR is an estimate of the loss that is expected to be exceeded for a given probability and time period For this portfolio, there is a 5 percent chance that there will be a monthly loss

of SEK 10,000,000 or more

2011 Modular Level III, Vol.5, pp.260-262 Study Session 14-39-j

Demonstrate the use of risk budgeting, position limits, and other methods for managing

market risk

The trading desks engage in activities that are weakly correlated and, therefore, a diversification benefit is experienced and it would be reasonable to expect that the combined VAR of the two desks will be less than the sum of the VARs of the individual

desks (SEK 20 million)

2011 Modular Level Ill, Vol 5, pp.245 Study Session 14-39-g

Discuss the advantages and limitations of VAR and its extensions including cash flow at

risk, earnings at risk, and tail value at risk.

Trang 23

VAR fails to incorporate positive results into its risk profile and, therefore, arguably provides an incomplete picture of overall exposures

2011 Modular Level Ill, Vol.5, pp 263-267 Study Session 14-39-k

Demonstrate the use of exposure limits, marking to market, collateral, netting arrangements, credit standards, and credit derivatives to manage credit risk

Marking to market and the use of credit default swaps reduce counterparty credit risk for Baltic

»

Định dạng
Số trang	47
Dung lượng	5,54 MB