the problem says that “assuming no leverage used”, figure out the number of futures needed.
well in the rest of the vignette it says $100mm is the portfolio. But in the answer they use $200mm in the calculation to figure out the amount of futures. Note, that the first problem in the vignette assumed a 100% leverage factor, which the problem at hand diliberately asking you to ignore.
Am I missing something here, or is this some sort of typo?
As you note the question is directing candidates to:
Base [the answer] on Exhibits 1 and 2;
assume no leverage is used.
The key is to follow both directions at the same time, that is to look at exhibit 1 as if it had only the column headed ‘Assets’ (i.e. pretending the column headed ‘Liabilities’ has been deleted).
In other words let’s not fall victims to the anchoring bias that would want us to believe that the $100M mentioned in the 1st paragraph is always the ‘right’ number. The new information is telling us that the asset is $200M and there is no liability.
Good luck, Carlo
i agree with you.
this was confusing. and i think its an error. they had a 100Million portfolio. how, with no leverage, would they have a 200 million $ portfolio. error IMO
how did you do on the moick?
Thanks Carlo, that makes sense.
Elite, I got 60%, (only did morning part, so 60 question), weakness was 1/6 on GIPS, and 6/12 on ethics. Everything else was good.
Just wanted to bump this to the top in case others ran into this issue more recently. My two bits, the comment about using no leverage in the question, makes the $200M (and the resulting duration of 6 for the assets) not relevant to question 38. However, without the $200M and duration of 6 you can’t solve the question. I sincerely doubt that this ambiguity would occur on the exam.
Anyway - happy studying
What about the MV of CTD / Is that correct? shouldn’t we use futures value?
I think this is an error. Even if you just considered the information in exhibits 1 and 2, the fact that the question directs you to not consider leverage in your answer would suggest removing the liabilities from the portfolio (the effect would also remove the corresponding assets). In other words, you can’t just “delete” liabilities without deleting the assets as well. This is especially true because the previous question called upon us to analyze the data in exhibit 1 as a levered portfolio.
Further, the question provides no directive where to find the target duration as it’s not in exhibit 1 or exhibit 2. Following the same logic that Carlo suggested will leave us without a target duration and we would be unable to answer the question.
The type of overanalyzing that is suggested by Carlo has got me in trouble in the past. I’m chalking this up as an error and moving on.
Actually I think the target duration is given as 4. What is ambiguous is the portfolio duration. Assuming the portfolio is just 100m, how do you get the duration? I just went with the 200 portfolio and duration as 6. Hope questions on the exam are less confusing
My point was that if you don’t consider information outside of exhibits 1 and 2, you would be left without a target duration as that information isn’t presented in either of those exhibits.
If you remove the extra 100m in assets, that would not impact the asset duration. Asset duration would still be 6.
I understand your point but don’t think it’s quite accurate that the portfolio duration is the same…if you invest the additional 100m in a high duration bond for instance, I think the duration of the portfolio will change
That’s a really good point, I’m wrong to assume that duration would be the same in the unlevered portfolio.
What is throwing this question off is the directive to “assume no leverage is used.” If that’s the case, how do you unlever the portfolio? Exhibit 1 shows a levered portfolio, unlevering it would have the effect of removing both the assets and the liabilities. As far as I can tell, this isn’t addressed in the readings.
What’s particularly annoying is that 2015 PM #20 approaches the answer exactly the same without that language, “assume no leverage is used.” It really doesn’t make sense.