RE: Item Set Questions on Mock Exam. Kapoor & McMorris Case

CFA Level III
#1

Kapoor:

  1. Regarding question #1, why can’t you use credit forward to protect the potential downside?

Why is binary credit options “provide payoffs contingent to a specific negative credit event?” Perhaps I should ask what is a binary credit option?

  1. Regarding question #6, why is the country beta used instead of the correlation between Brit. bond and German bond? Any chance of that correlation of .66 be used in other type of question?

McMorris:

  1. Regarding question #2, I know the answer but don’t totally understand why reason #3 “benefit from events that give rise to price chagnes which are more prevalent on the short side than on the long side” is right?

  2. Regarding question #6, what’s completeness fund & core satellite?

#2

  1. Binary credit options are triggered by a specific negative event, whereas a forward is determined only by the spread.

  2. If you want to find the sensitivity of a bond in a different conuntry, use country beta. Yield beta incorporates the correlations between the rates, but beta is from the prespective of the home country holding the home country constant. It’s just like beta in CAPM. The beta of the market is constant at 1.

  3. It sounds like it’s asking about alpha from the short side vs. alpha from the long side. The book says that there are more oppurtunities for alpha when shorting because there are relatively fewer short sellings compared to buyers, shorting is more combersome than buying, and analysts issue far more positive reports than negative ones. Because of this, there should be more oppurtunity to acheive excess returns from shorting.

  4. They’re very similar. A core-satellite begins with a core fund. The core fund is meant to acheive beta. the satellite funds are added to get alpha. A completeness fund is added to active portfolios to to get beta exposure.