it seems that schweser is in disagreement with CR with regards to two issues in fixed income. This is very alarming as to which story one should follow. Ur input is highly appreciated since I am completely clueless. 1) Schweser book 3/page 92 hedging example VS CR vol 4/page 49 question 9. CR states that one should hedge if anticipated return on currency is less than what is implied by interest rate differential between both currencies. Schweser states the exact opposite !!! 2) Schweser book 3 page 27 VS cr volume 3 page 340 example 6. which covers calculating rebalancing ratio for bond portfolio. While calculating portfolio DD CR material calculates an average duration in order to arrive at total DD given equal allocations. Schweser on the other hand does add all DD in order to arrive at total DD given non equal allocations. is it true that an average method is employed given equal allocations while summation is to be used given non equal allocations in order to arrive at total DD.
- If anticipated return is less than what is implied by the forward rate, you are going to get a lesser ruturn if you leave the currency exposure unhedged. Therefore, you should hedge using a forward contract. 2) This has been discussed in a couple of other posts.
alex3 Wrote: ------------------------------------------------------- > it seems that schweser is in disagreement with CR > with regards to two issues in fixed income. This > is very alarming as to which story one should > follow. Ur input is highly appreciated since I am > completely clueless. > > 1) Schweser book 3/page 92 hedging example VS CR > vol 4/page 49 question 9. > CR states that one should hedge if anticipated > return on currency is less than what is implied by > interest rate differential between both > currencies. > Schweser states the exact opposite > !!! Exactly which example on p.92 are you talking about? I find both (“to hedge or not to hedge”, and “… continued”) conforming to the same “CR” arguement, and are correct. - sticky
hi sticky. both schweser examples are the exact opposite of the material in CR which i found confusing if you read the both.
- is errata posted on CFAI http://www.cfainstitute.org/cfaprog/resources/pdf/Level_III_Errata.pdf total portfolio dollar duration should be the sum of the respective individual DDs
alex3 Wrote: ------------------------------------------------------- > hi sticky. both schweser examples are the exact > opposite of the material in CR which i found > confusing if you read the both. I have read both. All of them are correct and consistent — if what I expect is better than implied by market, NO hedging. And vice versa. In CR ==== 9A Yen expected to appreciate by 1.5% and that’s better than the 1.1% implied by market. Here what I expect is better, so I should do nothing — no hedging. 9B Yen expected to appreciate by 0.5% and that’s wose than 1.1%. So I better lock myself to the market implied one by DOING hedging. In Schweser ========= Foreign bond expected to DEPRECIATE by 0.4% but market implies that it will depreciate by 0.8%. Since I will profit more if my expectation is correct, I will NOT hedge. Hope this helps. - sticky
You only want to HEDGE if YOUR expecation is better than MARKET (hedged) expectation.
ws Wrote: ------------------------------------------------------- > You only want to HEDGE if YOUR expecation is > better than MARKET (hedged) expectation. I think the other way round. If your expectation is better (eg. foreign currency appreciating more than market expectation), you are NOT hedging. Just let it go. - sticky
sticky Wrote: ------------------------------------------------------- > ws Wrote: > -------------------------------------------------- > ----- > > You only want to HEDGE if YOUR expecation is > > better than MARKET (hedged) expectation. > > I think the other way round. If your expectation > is better (eg. foreign currency appreciating more > than market expectation), you are NOT hedging. > Just let it go. > > - sticky Sorry!!! Thanks for calling me out on that…3 day long weekend messed me pretty good. Once again, thank you for that. I was backward.
thanks Sticky, u are right, DEPRECIATE was the key word in Schweser example. Must ve been half asleep when I read that. regards.