another fixed income portfolio management question

hi guys,

on p.95 of fixed income portfolio mgmt,

it says that “generally, it is impossible to construct a perfect hedge, as you would need to know in advance the ending value of the foreign currency asset to know how much currency to sell forward. on the exam you would sell beginning value unless directed otherwise.”

i dont get why you would not know the ending value of the foreign currency asset.

wouldnt you know as long as you have the investment amount + the nominal return?

what does it mean by sell beginning value?

please help, appreciate!

Suppose that your domestic currency is Swiss francs and you buy bonds denominated in British pounds. You know the value of the investment today, but you don’t know what the value of the investment will be when(ever) you will sell it; hence, you do not know the value to hedge the currency risk fully.

By selling “the beginning value” they mean you hedge the value you invest today, and forget about hedging the potential profit.

thanks for your reply. but since its a bond investment. how can i not know the value of the investment when i sell it?

its not like its a stock.

please help clarify. thanks!

The future price of the bond will depend on its yield to maturity when you sell it; you do not know today what it’s future YTM will be. In that respect it is, indeed, very much like a stock.

You should have encountered this at Levels I and II.

If you somehow have a crystal ball that tells you the value of your bond when you sell it, please let me know.

Good to see you S2000magician here on AF. I remember many years ago we had a brief encounter on s2ki forum. I had to sell my S2000 last year a few months prior to my marriage and I miss it every day. Hope things are well with you.

Doing well, thanks: mine has over 205,000 miles on it.

Good to see you here.


You’re welcome.

hi guys,

on p.85 of schweser notes on fixed income portfolio management:

there is an example:

“A portfolio manager holds 1,000 bonds wiht a face value of $1 million. The current spread over a comparable US Treasury is 200 basis points. The portfolio manager purchases credit spread calls with a strike price of 250 basis points, notional principal of $1 million, and a risk factor of 10. At the option’s maturity, the bond price is $900, implying a spread of 350 basis points. what is the option value?”

may i ask how you calculate the 350 basis points? is there any way to calculate it?

thanks. appreciate your help.

I do not see anywhere where they tell you what the bond’s YTM was. This seems to have been an “implication” made by Schweser.