Tricky Question

You are reviewing several possible trades that you would like to place in order to rebalance your portfolios. You are trying to determine which market to place the trades in as well as how to best place the trades themselves in order to reduce the total cost to your portfolio. Question: Correlation risk is a disadvantage of which of the following trading methods? a) External Cross b) Internal Cross c) Futures d) Indication of Interest

D or C


  1. I am not sure where this question is suddenly popping out of. 2. If it is Quant, then I would guess B - because with an internal set of data, if you end up getting to a correlation, you might end up with faulty correlations. CP

Answer is C - Futures Rationale: A manager looking to place a trade can take a similar position in the futures market while the transaction is slowly executed. The advantage - low opportunity cost. The disadvantage - correlation risk, i.e. the futures and underlying are not perfectly correlated. This method is best used for transacting multiple securities or a basket of stocks rather than a single security.

What is internal & external cross?

I know i’ve seen it somewhere… can’t remember where

An internal cross is where you have client A who wants to sell and client B who wants to buy the same stock. Instead of going through a dealer, you just cross the deal. External - I suppose this would be similar, but crossed through an exchange or 3rd party. We sometimes have to do this in the UK when transferring assets into an ISA (a tax wrapper) - you can’t buy from yourself, or transfer existing assets in - so you have to do an external cross, bouncing it off a broker, and paying commissions/stamp duty. Stupid system.

makes sense chrismaths. thanks Can anybody define indication of interest?

google is your friend!

are these things even relevant for this year’s exam? I couldn’t find any of these in the LOSs or index (CFAI text) or schweser qbank…