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LOS n: Explain the three components of return for a commodity futures contract and the effect that an upward- or downward-sloping term structure of futures prices will have on roll yield. ffice ffice" />
Q1. Jill Beaman, CFA, notices that for wheat futures there is a downward-sloping term structure of futures prices. Beaman should recognize that this would be associated with:
A) normal backwardation and a negative roll return.
B) contango and a positive roll return.
C) normal backwardation and a positive roll return.
Correct answer is C)
Normal backwardation, when it exists, produces a downward-sloping term structure of futures prices. Such a condition predicts a positive roll return. If the term structure is positive, which is a result of contango, the roll return would be negative.
Q2. With respect to a commodity futures contract, the collateral return:
A) is the opportunity cost of storing the commodity.
B) represents the return on a fully hedged commodity position which should be approximately the risk-free rate.
C) is highly correlated with the spot rate.
Correct answer is B)
The collateral return or “collateral yield” is the result of the no-arbitrage assumption that if an investor is long a contract and invests an amount in T-bills that will be equal to the amount required to pay for the required purchase at the maturity of the futures contract. Such a fully-hedge position should earn the risk-free rate.
Q3. Jill Beaman, CFA, has recorded the components of the return on a commodity futures contract. The return on the futures contract is $17, the spot return is $9, and the roll return is $5. What is the collateral return?
A) $3.00.
B) $6.89.
C) $31.00.
Correct answer is A)
Total return = spot return + collateral return + roll return.
Collateral return = total return ? spot return ? roll return.
$3 = $17 ? $9 ? $5
Q4. Jake Billingsly, CFA, and Paula Sloop, CFA, are investigating alternative investments for their clients. They have both institutional and private wealth clients, and Billingsly and Sloop have investigated the special issues that alternative investments raise for investment advisers of private wealth clients. When compared to institutional clients, Billingsly says that decision risk is higher for private wealth clients, and Sloop says that tax issues are generally more complex for private wealth clients.
Billingsly and Sloop review the principal classes of alternative investments, and they compare the features of real estate, private equity, commodity investments, hedge funds, managed futures, buy-out funds, infrastructure funds, and distressed securities. Some of their clients have been interested in venture capital funds, but Billingsly and Sloop think that buy-out funds may be a better alternative. Compared to venture capital, Billingsly says that buy-out funds tend to have lower leverage. Compared to venture capital, Sloop says that buy-out funds tend to have steadier cash flows.
Some of the institutional clients have held venture capital investments for several years. Billingsly and Sloop anticipate some of these investments are approaching the exit stage. As they look over the investments held by the institutional clients, they anticipate that the institutions’ investments in venture capital will most likely realize their value through one of four ways: i) the entrepreneurs buying out the venture capital investment from the venture capitalists, ii) a merger with another company, iii) an acquisition by another company, or iv) an initial public offering when the company in which the venture capital is invested and goes public (IPO).
Commodities are another area of interest. Many of both the private wealth clients and the institutional investors have asked if commodities would be good hedges against inflation. To accommodate the demand for inflation hedges, Billingsly and Sloop arrange for the clients to take long positions in energy, livestock, industrial metals, and precious metals. They want to use futures contracts that have the potential for the highest roll yield with a buy-and-hold strategy. They specifically focus on the topics of backwardation and contango and plot the roll returns for historical commodity futures over their respective lives. Billingsly and Sloop notice that the returns generally change over the life of each commodity futures contract and take this into account in their investment plans.
Billingsly and Sloop look at different types of hedge funds. They analyze the different styles and the fees the managers charge. They notice that one of the most popular hedge fund strategies attempts to identify overvalued and undervalued equity securities. The strategy takes long and short positions, but the goal of the fund is not necessarily to be market neutral or industry neutral. They find that the fee structures generally have three components. There is also a feature called a high water mark, and they discuss the rationale for the high water mark.
Billingsly makes a statement about the decision risk and Sloop makes a statement about tax issues of private wealth clients compared to institutional clients. With respect to these statements:
A) both Billingsly and Sloop are incorrect.
B) Billingsly is correct and Sloop is incorrect.
C) both Billingsly and Sloop are correct.
Correct answer is C)
When compared to institutional clients, decision risk is higher for private wealth clients, and tax issues are generally more complex for private wealth clients.
Q5. Billingsly and Sloop compare buy-out funds to venture capital. With respect to the statements they make:
A) Billingsly is correct and Sloop is incorrect.
B) both Billingsly and Sloop are correct.
C) Billingsly is incorrect and Sloop is correct.
Correct answer is C)
Buy-out funds tend to use more leverage, so Billingsly is wrong, but Sloop is correct in that the cash flows are steadier.
Q6. Of the ways that Billingsly and Sloop estimate that firms invested in venture capital might exit and realize the value of their investment, the one that is not among the usual methods of exit is:
A) an IPO.
B) a merger with another company.
C) entrepreneurs buying out the venture capital investment from the venture capitalists.
Correct answer is C)
Mergers, acquisitions and IPOs are the usual methods. Entrepreneurs buying out investors is not a likely method of exit for the venture capitalist.
Q7. With a futures buy-and-hold strategy, a positive roll yield would be associated with a commodity yield curve that exhibits:
A) backwardation, and the return decreases as it approaches maturity.
B) contango, and the return increases as it approaches maturity.
C) backwardation, and the return increases as it approaches maturity.
Correct answer is C)
A roll yield from a buy and hold strategy is only possible when there is backwardation. The return increases as the contract approaches maturity.
Q8. The hedge fund style that Billingsly and Sloop find to be the most popular, and that they describe, would most likely be categorized as:
A) convertible arbitrage.
B) hedged equity.
C) merger arbitrage.
Correct answer is B)
Identifying overvalued and undervalued securities without focusing on making the fund market or industry neutral is called the hedge equity style.
Q9. The rationale for the high water mark is to:
A) make sure managers get paid when the value of the fund increases steadily.
B) prevent managers from getting overpaid when the value of the fund oscillates.
C) prevent managers from getting overpaid when the value of the fund increases steadily.
Correct answer is B)
The high water mark prevents a manager from getting paid twice for the positive increase in the fund’s value. If a fund goes from $10 million in value to $11 million in value, the managers should get paid an incentive fee on the $1 million move. If the $11 million is set as a high water mark, the manager will not be paid an incentive fee if the fund declines below $11 million and then rises back to that value.
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发表于 2009-3-11 09:55
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