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Level III

How to Use a CFA® Mock Exam to Sharpen Your Testing Skills

Thr following post is sponsored by KaplanSchweser:

You’ve put in your 300 hours. You’ve attended the classes, you’ve gotten in some serious question practice, and your books look like they’ve been to war. Now it’s time to put all your hard work to the test (before the test). It’s time to sit for a CFA® mock exam.

Advice for the Level III Essay Exam

The Level III exam is made up of two parts. The first is a structured response (essay) exam and the second, a vignette multiple choice exam. This post focuses on the structured response, which, in my opinion, is the greatest obstacle lying between you and the CFA charter.

Until now, you’ve only been answering multiple choice questions in your CFA exams. At Level I and II, if you had an idea of what the question was about, there was a reasonable chance of you picking the right answer.

ZCB: Structural risk vs. Interest rate risk

Can someone confirm the following:

  • structural risk: arises from non parellel shifts and twists in the yield curve causing cash flow yields to change and as a result perfect immunization is not achieved
  • interest rate risk: arises from fluctuation in bond prices due to changes in interest rates.

If the above is true, can I state the following:

zero coupon bond has no structural risk and has higher interest rate risk than a coupon bearing bond? …thx!

Reading 21 EOC #17

Can anyone explain the answer the CFA provides for this question? 

Q 17.

Subscriber 2
“I have observed that many of the overseas markets for Korean export goods are slowing, while the United States is experiencing a rise in exports. Both trends can combine to possibly affect the value of the won (KRW) relative to the US dollar. As a result, I am considering a speculative currency trade on the KRW/USD exchange rate. I also expect the volatility in this exchange rate to increase.”

PM vs. AM exam prep split

Hi all. How are people splitting their time prepping for AM vs. PM?

AM exam topic analysis

Has anyone prepared a topic analysis of the AM exam from lets say 10 years ago and identified which topics in particular subjects have been heavily tested over the years? 

Formulating a Client-Appropriate Currency Management Program

Generally speaking, the strategic currency positioning of the portfolio, as encoded in the IPS, should be biased toward a more-fully hedged currency management program the more volatile (i.e., risky) financial markets are.

Why? The asset value will fluctuate largely if the financial market is high volatile. Hence, more frequent rebalancing will be required to fully hedge the currency risk. The more frequent rebalancing, the higher trading cost. Hence, fully hedge should not appropriate if financial market is high volatile.

currency hedge

Ostermann believes that currency markets are efficient and hence that long-run gains cannot be achieved from active currency management, especially after netting out management and transaction costs. She uses this philosophy to guide hedging decisions for her discretionary accounts, unless instructed otherwise by the client.

Based on Ostermann’s views regarding active currency management, the percentage of currency exposure in her discretionary accounts that is hedged is most likely:

  1. 0%.

Hedging Problems

The Aggressive Growth Fund also has an unhedged foreign-currency asset exposure denominated in the South African rand (ZAR). The current mid-market spot rate in the ZAR/GBP currency pair is 5.1050.

Assuming that all ZAR/GBP options considered have the same notional amount and maturity, the most expensive hedge that Brixworth & St. Ives could use to hedge its ZAR exposure is a long position in a(n):

  1. ATM call.

  2. 25-delta call.