# CFAI RESPONSE: Yield Beta Question

So they got back to me today: “The vignette is being updated and the yield beta is being changed to 1.00. Also, the futures contract being used is the CTD bond. Yes, if you are given the yield beta of the bond to be hedged, you should multiply the hedge ratio by the yield beta” makes sense if the bond you’re hedging was the CTD yield beta is 1 and it was a typo. hope you’ll can sleep easy now! best, Frank

WOAH. thanks fotis. i thought CFA doesnt reply to errors individually !

YEAH, that’s right CFAI. AF 1 … CFAI 0

fotis21r Wrote: ------------------------------------------------------- > So they got back to me today: > > “The vignette is being updated and the yield beta > is being changed to 1.00. Also, the futures > contract being used is the CTD bond. Yes, if you > are given the yield beta of the bond to be hedged, > you should multiply the hedge ratio by the yield > beta” > > makes sense if the bond you’re hedging was the CTD > yield beta is 1 and it was a typo. > > hope you’ll can sleep easy now! > > best, > > Frank really?

McLeod81 Wrote: ------------------------------------------------------- > YEAH, that’s right CFAI. AF 1 … CFAI 0 lol…

holy crap! how much time did we waste debating this? or i should say you guys debating, and me reading. as usual.

So, if you get the yield beta, use it. And the same for conversion factor?

good work. good work!

Team AF get’s CFAI to change a Mock Exam question… There’s something you don’t see every day.

someone i know emailed a couple of weeks ago on yield beta… they said it was right… but not sure if it’s same question and/or it sounds like they changed their view. one thing that kills me is similar stuff done different all throughout curriculum.

YEAH! That is good to have a final definite answer on that question. westbruin Wrote: ------------------------------------------------------- > one thing that kills me is similar stuff done > different all throughout curriculum. I have not seen much which is not consistent throughout the curriculum. Could you add examples? MH

> > I have not seen much which is not consistent > throughout the curriculum. Could you add > examples? > > MH duration of the floating leg of a swap… and i would add that i’m comparing to level 2 curriculum too. asset allocation chapter and life cycle investing give completely different advice on young people and allocation to equities… that’s a HUGE ONE. corner portfolios they just do weighted average of std deviations. simple weighted average, not SQRT of weighted sums… commodities - storable vs. non-storable… i just don’t like how they do the same subject twice with different authors.

I am very sorry that I do not know which vignette you are talking about. Is it the vignette in Example 11 on P.109~110 of Text Volume 4 ?

Regarding the duration of the floating leg of a swap, we’re supposed to use 1/2 of the reset period (ie 0.125 for QTR pay). I’ve seen this in a couple of CFAI problems. Also, Schweser has errata correcting the explanation in their notes where they say to use the length of the reset period (ie 0.25 for QTR pay).

McLeod81 Wrote: ------------------------------------------------------- > Regarding the duration of the floating leg of a > swap, we’re supposed to use 1/2 of the reset > period (ie 0.125 for QTR pay). I’ve seen this in > a couple of CFAI problems. Also, Schweser has > errata correcting the explanation in their notes > where they say to use the length of the reset > period (ie 0.25 for QTR pay). so everyone is on 1/2 reset period now?.. i was actually hoping they’ll just tell us, but i guess not because knowing that it’s very short is important. i’ll compile a list. that was off the top of my head in 2 minutes. BTW mcleod, how do you keep all the interest rate calculations straight? how to discount exactly? whether you bring the payment back one period or not? end of period vs. start of period?.. it was better last year because everything was in one place.

Interest Rate stuff: Use A/360 for whenever splitting an interest rate. Use X^(365/A) when compounding to get an annualized rate from a periodic rate Use the Forward Discount Factors for valuing swaps (Swap Fixed Rate)*[1 / [1+r*(A/360)]^t] using the appropriate forward rates. Remember to add one to the last payment. When calculating effective annual rate, SUBTRACT the call premium from the loan amount or ADD the put premium to the loan amount (in the denominator)… etc, etc, etc. There’s tons of interest rate stuff to remember. I don’t think there’s any trick to it. Just try to hit every type of question.

which question in the mock is this?

> > Use the Forward Discount Factors for valuing swaps > (Swap Fixed Rate)*[1 / [1+r*(A/360)]^t] using the > appropriate forward rates. Remember to add one to > the last payment. > mcleod, thanks very much… what reading is this from?? is that an optional reading? i hope so how many substantive things have u found in curriculum that aren’t in schweser? i won’t ask what they are. but alot, or a few??

Hmm… It’s really all over the place. Mostly in the Risk Management topics. Reading 38 is swaps (really short, but take a look at the Schweser errata because they left out one of the calculation examples). There’s more in the fixed income derivatives reading (31). I think it was last year that CFAI made you calculate the value of a swap to determine who’s exposed to credit risk and how much. I think most if not all of this stuff is covered by an LOS.

westbruin Wrote: ------------------------------------------------------- > duration of the floating leg of a swap… > and i would add that i’m comparing to level 2 > curriculum too. Correct, I was not aware of this half reset period for floating but makes perfectly sense. > asset allocation chapter and life cycle investing > give completely different advice on young people > and allocation to equities… that’s a HUGE > ONE. To our advantage, in a way because CFAI cannot ask a question with ambiguous answers when you take the readings litterally… > corner portfolios they just do weighted average of > std deviations. simple weighted average, not SQRT > of weighted sums… On the corner portfolio, even in Schweser they explain that having a linear interpolation means that there is a perfect correlation of the portfolios (which is wrong from a theoretical point of view, but probably right from a practical one) > commodities - storable vs. non-storable… > > i just don’t like how they do the same subject > twice with different authors. I agree with you, have similar subjects / issues dealt with different authors adds confusion. And I have to complain that Schweser did not do a good job here in helping us (for example in the SS) to have a better overview of the different approaches. They missed an opportunity here, I think. MH