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Study Session 8-9: Asset Allocation and Related Decisions in Portfolio Management

Strategic asset allocation

Does anyone know where I can find in the text where it mentions that strategic asset allocation is the biggest contributor to portfolio performance?

Currency options

If there is an USD/EUR currency pair:

  • Is buying a OTM call on EUR same as buying a OTM put on USD?
  • Is selling a OTM call on EUR same as selling a OTM put on USD?

Last minute doubt - currency management/ over under hedge

The portfolio has a long exposure to CHF 10,000,000 . To hedge it the portfolio manager sold CHF forward. 1 month later, the value of CHF is 11,000,000 , so to rebalance it as per dynamic hedging we will sell additional CHF 1 million to increase the hedge.

Now, when it comes to currency we over hedge if the currency is expected to depreciate and under hedge if we expect it to appreciate (to capture the upside potential of currency). But why not do the same thing for the asset exposure above?

Asset Class Criteria

Would it be correct to say that inflation-indexed bonds and nominal bonds are mutually exclusive?

Kaplan Practice Exam Vol1 Exam 1 Q24 - Afternoon

Hi all.

The question asks to validate a statement - the client has a long yen exposure. The statement is:

An alternative to seeling the yen forward to implement a currency hedge would be to buy calls on the USD. This would protect the portfolio from currency risk while still retaining potential currency upside.

Rebalancing range

Believe in Mean-reverting -> Tighter rebalancing range. 

What is the logic in above statement?  If you believe in mean-reverting, shouldn’t allow it to developing till eventually self-rebalance to mean?  

thanks in advance.

2016 AM 2C

I understand the level 3 curriculum teaches approximation. However, for this question, would I still get full credit if I use the actual forward rate?

Forward rate = 2*1.018/1.04 = 1.957692

Hedged return = 1.957692/2*1.075 - 1 = 5.23%

This way of solving the problem was not provided in the CFA guideline answer.

Currency mgmt

I have two questions in the currency management reading:

1.What is the difference between FX swaps and currency swaps, I thought both were the same thing, any insights on that?

2. How is “The return on a domestic asset is not affected by exchange rate movements of the domestic currency.” in case of the devaluation of the domestic currency would not the domestic asset be affected?

Overhedge or underhedge

I read the following paragraph and am not sure if it’s correct:

If a short position of Currency A in an A/B forward contract. To roll forward, need to use matched swapàbuy A in spot market and sell A forward. Sell less A (under-hedge) if A is expected to depreciate or Sell more A (over-hedge) if A is expected to appreciate.

My question is if A is expected to depreciate, should I sell more A (over-hedge) in forward market and vice versa?

Shortfall Risk

I see Shortfall Risk in the curriculum twice, once as an equation and once as a different concept:

Shortfall Risk = Expected Return - 2 * St Dev

Concept in Liability Relative Investing: Shortfall Risk is the risk of having insufficient assets to pay obligations when due

Why would they use the same word for two different concepts?