Abiquia Mutual Case Scenario error in solutions?

CFA Level III
#1

“Puhuyesva’s approach matches the interest rate sensitivity of the asset portfolio to that of the liabilities. If she has reasonably strong beliefs about how interest rates will change in the near future and the surplus exceeds her threshold of 10% of assets , she will adjust the interest rate sensitivity of the asset portfolio to attempt to increase the surplus. She typically uses derivatives positions to adjust the asset portfolio’s interest rate sensitivity, rather than buying and selling securities.”

compared with the other portfolio styles.

Q. The most appropriate action given Puhuyesva’s views on interest rates and the information in Exhibit 1 would be to buy:

  1. 492 contracts.
  2. 614 contracts.
  3. 552 contracts.
    Solution

B is correct. The number of futures contracts needed to fully remove the duration gap between the asset and liability portfolios is given by Nf=BPVL−BPVABPVfNf=BPVL−BPVABPVf, where BPV is basis point value (of the liability portfolio, asset portfolio, and futures contract, respectively). In this case, Nf=299,860−243,376102.30=+552.1Nf=299,860−243,376102.30=+552.1, where the plus sign indicates a long position in or buying 552 futures contracts. Because the value of assets is more than 2% greater than the value of liabilities (217.3/206.8 – 1 = 5.1%) and Puhuyesva believes interest rates will fall, the duration of assets should be greater than the duration of liabilities so that the surplus will rise if interest rates do fall. Therefore, more than 552 contracts should be bought.

It seems they didn’t use the same threshold as given in the problem…

#2

yes, this is truly an agonizing experience. I always thought that CFAI would be more careful and professional in writing questions and solutions (at least proof-read them)

edit: it does say in the 3rd paragraph that she will do the duration management anyway, so I’m not sure.

#3

It does not say in the 3rd paragraph that she will do the duration management anyway.

It says that she “wants to position the asset portfolio accordingly.”

If English words have any meaning, this HAS to mean, “accordingly, given the rules we just spelled out for you in the preceding paragraph.” Not “accordingly, given general principles that contradict the rules this particular person follows.”

And even if they did mean “given general principles”, then why would they make a big deal about the surplus being more than 2% of liabilities in the answer?

They goofed on this one, plain and simple.

#4

Yeah I was looking at this one too. There are other errors as well throughout the topic tests.

#5

Same here,

Nevertheless, the answer to that question is correct.

#6

Just did this question and answered C (match it fully). I calculated the surplus which was lower than 10% so I did not overhedge… really frustrating that they don’t review the solutions properly.

There are actually 2 errors here:

  1. Surplus is less than 10% not greater than 2% as you mentioned

  2. The hedging rule says surplus should exceed 10% of assets while the solutions calculates it as 10% of liabilities.