Courtsey - Allen Resources from their website (question of the day). The answer is confusing, so wanted to check with AF fellows. Vignette: Eric Oberman manages several international fixed income portfolios. Eric is currently reviewing potential arbitrage and hedging opportunities within these portfolios, as well as deciding how to best take advantage of potential opportunities. Eric is meeting with his protégé, Laura Koning. Laura is new to the firm and is eager to learn the ropes of the international bond markets. Question: Laura asks Eric about the role of economic analysis in international bond portfolio asset allocation. All of the following are economic factors except: a) Currency patterns b) Debt level c) Balance of payments d) Political landscape
D
Initially I would choose D as maratikus did, however being that you said the ans. was confusing… I would choose A… because in some strange case, I can imagine this question referring to Political landscape as to the degree of economic liberialization… who knows…
I agree that’s the answer is between A and D (B and C are obviously out). I chose D because currency appreciation/depreciation can be considered a currency pattern and is used in economic analysis.
If this has to do with sovereign debt then, I would think, you would have to look at the country’s ability and willingness to repay its debt (which ties in with D).
I think its A --because currency should be considered a separate issue ( although important , from hedging standpoint )
c. D, willingness to pay is probably the most important factor, followed by ability, a, then b. priorities on debt payments will also be a function of d.
I will pick D. I am addressing Laura’s question. “Laura asks Eric about the role of economic analysis in international bond portfolio asset allocation. All of the following are economic factors excep”. The questions is asking about the economic factors. Choic D is the only polictical factor in international bond analysis.
I would say D, and be fairly (but not 100%) confident about that. The question is not about whether the political landscape is a relevant factor to consider in portfolio management. Instead, the question is about whether the political landscape is an economic factor, which most people would say it’s not. I’m a political economist, so I think that political factors are so tied in with economics that they might as well be considered economic factors, but I also recognize that most people don’t think about it this way - and answered the question accordingly.
Going with D.
yeah makes sense. Although D is strange this year because of the three-yeah whatever.
D
I also chose D but the answer is A, the reason is that A is used for technical analysis, the rest all are economic analysis. Correct answer: Currency patterns > Rationale: Currency patterns would be used by a Technical Analyst to interpret future opportunities. By forming raw financial data into charts, the Technical Analyst can look for patterns in the charts and formulate buy and sell decisions from them.
So, the relative relationship between spot FX and PPP FX would not be a “currency pattern” or would that not be part of economic analysis? … that’s a poorly worded question.
So the key to answering the question is to realize that they think politics=economics, and to understand that “currency patterns” <> “currency risk”. Sounds like a poorly worded question. Was this a CFAI sample question? I find that most CFAI questions are better worded than either Schwesser or Stalla’s. If it’s unclear, it usually means you didn’t absorb the material well. However, I do remember one question last year about socially responsible stuff where it really seemed up in the air about whether they wanted to emphasize the smallcap-largecap dimension or the value-growth dimension. On exam day, you should remember that one or two questions like that doesn’t usually make a difference on whether you pass.
bchadwick - Thanks a lot for your inputs and suggestions, much appreciated.