Question number 2, 2011 mock exam, morning session

CFA Level III
#1

IN part A, the answer takes 250,000 x 1.03% = 257,500 ( it means that it takes account of inflaction already in calculating required return)

I dont really understand why when the answer gets 4.82% for return, it takes 4.82% + 3% = 7.82% for the required return. why we have to add 3% inflation rate to 4.82%. We alread account for 3% in calculating livng expense increase.

Question number 8, part C in the same exam,

The company calulate profit and loss for PLN without taking accounting for hedge effect. The question clearly says that the company uses currency hedge for its principle value. according to my calculation, the profit and loss should be 435,000 instead of 400,000.

Hope someone have time to look at it

Thank you for your time and good luck to you on the exam!

#2

250 000 is his living expenses last year. so you need to inflate it by 1 yr to have this year living expense.

remeber to compare asset at T=0. so if living expenses is at T = -1 you have to inflate it to bring it to today. total portfolio at T = 0 is 4 350 000

so required return to cover this year expense is 4.82%. if you only have 4.82% of return, next year at T=1, you will be short if you only have 4.82% return since the living expense will have inflate again by 3%.

t = 0, 4 350 000, living expense = 209 500, return = 209 500 asset at the end = 4 350 000

@t=1 4 350 000 living expense = 209 500 * 1.03 return = 209 500.

as you can see you will be short and start taking out capital. thats why you need to compound the return with inflation

#3

for question 8

refer to S2000 answer here :

http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91321469