Currency management problem question

CFA Level III
#1

Anyone can help with this…please provide explanation for your answer. Will share the suggested answers (which i dont seem to get).

#2

any takers???

#3

What is the question? the attachement is not showing up…

#4

Here’s my take. Been awhile since I reviewed currency management:

Q1) A

IRP is suggesting via forward rates that the expected spot rate in 6 months is 5.14 ARS / USD whereas the expectations are for 3.4580 ARS / USD.

Q2) C

ARS / USD should depreciate by 3.4% but is only expected to depreciate by 2.8%, therefore the roll yield is still positive roll yield = roll yield + spot change = 3.4% - 2.8% = 0.6% gain

what are the answers?

#5

  1. A

  2. A

#6
  1. If the manager did nothing, manager expects to lose 2.8% in USD term. If manager shorts ARS agn USD (do hedge), manager will lose 3.2% in USD term. The only explanation is the manager wants to take the currency risk out so it’s driven by risk aversion.
#7

Thanks Frank. Part 2 is now sorted. But I’m still struggling with part 1. I don’t seem to get the link of carry trade and c-interest rate parity. I understand usd will trade at forward premium under C-rip. Under carry trade you borrow use and invest in ars.

#8
  1. A. ARS expects to appreciate so no need to hedge. The manager can play additioanl carry trade to earn the money.

PS. CFA curriculum: The carry trade strategy (borrowing in low-yield currencies, investing in high-yield currencies) is equivalent to a strategy based on trading the forward rate bias. Trading the forward rate bias involves buying currencies selling at a forward discount, and selling currencies trading at a forward premium.