Victor manages a ‘life style’ fund. Composition of the fund is 40% US Equities 40% US Bonds 20% International Equities Victor expects international equities to begin an immediate, significant price decline. He also expects US interest rates to rise sharply, starting 1 year from now Which of the following transaction is least appropriate for Victor’s fund A. Sell a 2-year forward contract an the “All European” stock index B. Sell a 60-day future contract on a German DAX stick index C. Buy a 1*15 month FRA D. Sell a 18-month Treasure Note Futures contract.
D -> there is no point in going short bonds if the portfolio manager doesn’t expect rates to go for a year other options reflect PM opinions
Right on everybody!! Correct answer is D. I, for my life of it, can’t think about how to go about solving such problems. Hopefully all of derivatives should come back, when I do a review on it. If nothing clicks I will just do a birds-eye-review of it knowing it’s only 5-10% of the exam and can’t sign my life-off for that section with so little time at hand.
Dinesh…you are going to pass. I know it. You can do it!
I just wish we make it to L3 - mwvt9, I seriously can’t study this all over again next year. I’d better give up CFA and run for my MBA. So many decisions upheld because of this, it’s the make or break deal.
Nah. We have to get it done this time. I am feeling a little better today. Some of it is starting to stick. Doing better on quant. The sauce is helping. We still have 20 days. We can get ready…
dinesh.sundrani Wrote: ------------------------------------------------------- > Victor manages a ‘life style’ fund. Composition of > the fund is > > 40% US Equities > 40% US Bonds > 20% International Equities > > Victor expects international equities to begin an > immediate, significant price decline. He also > expects US interest rates to rise sharply, > starting 1 year from now > > Which of the following transaction is least > appropriate for Victor’s fund > > A. Sell a 2-year forward contract an the “All > European” stock index > B. Sell a 60-day future contract on a German DAX > stick index > C. Buy a 1*15 month FRA > D. Sell a 18-month Treasure Note Futures contract. so dinesh, you want to kill yourself too? …aarrrrrrrrgggggghhhhhhh, its like running into a brick wall, im not a big fan of derivatives.
mwvt9 - I actually feel, I can do it after talking to you, always, somehow … yes SeanC - you better come down and shoot me, before I shoot myself after seeing the results.
I don’t see why C helps… the rate isn’t changing until 12 months later? Isn’t D a better choice? It’s 18 months contract, and there is profit after a year
I thought hard between C and D too. Even though buying the FRA won’t reap return until 12 months later when rates go up, it is more appropriate than selling the bond future. If rates suddenly drop within the 12 months, bond price will soar, and our PM is screwed.
avnx - I got this question from a friend to mine, and I just know the answer is option ‘D’. No description. But I feel answer to this should be C. I will confirm again.
well if the rate suddenly drop within 12 months then your FRA will lose a lot too, no?