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周教授CFA金融课程:2021年CFA一二三级系列课程
Jill Pope, CFA, manages a large multinational portfolio that includes assets denominated in over 20 currencies. Pope is planning to hedge this portfolio for currency risk. Composing:
A)
a hedge with any measurable effectiveness is not possible because of the many currencies.
B)
a perfect hedge may not be possible, but she may be able to compose an effective hedge with futures on a few major currencies.
C)
a perfect hedge is always possible because all currencies have futures markets that can compose hedges for each currency.



Since many currencies do not have actively traded futures markets, the best choice for hedging a portfolio like the one in this problem would be to choose a few contracts on major currencies. To determine the best type and number of contracts, Pope can use a multiple regression of the returns of her portfolio on the futures returns of liquid contracts for a few major currencies.

TOP

Jill Pope, CFA, is a portfolio manager in the United States that will begin managing a portfolio denominated only in Euros. Her supervisor asks her to hedge the portfolio against currency fluctuations using an instrument that will effectively be an insurance policy against downside risk while offering upside potential. To do this, Pope:
A)
should take a long position in $/€ forward contracts.
B)
should buy put options on the $/€ exchange rate.
C)
should sell put options on the $/€ exchange rate.



Put options offer an insurance type protection. Pope can purchase out-of-the-money put options, for example, which will benefit if the Euro depreciates. If the value $/€ declines, the increase in the put option’s value will compensate Pope for the loss the Euro depreciation causes to the portfolio. If the Euro remains unchanged or appreciates, Pope can allow the puts to expire like an insurance policy that never needed to be used.

TOP

Compared to options on currencies, futures contracts on currencies offer a:
A)
more perfect hedge at a higher initial cost.
B)
more perfect hedge at a lower initial cost.
C)
less perfect hedge at a lower initial cost.



Futures have a negligible initial cost and the symmetric payoff of the futures usually offers a more perfect hedge than that offered by a put contract, which has a premium that is an upfront cost.

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Phil Johnson, CFA, is a portfolio manager in the United States and manages a portfolio denominated in yen. Johnson has been using forward contracts on the yen to hedge this portfolio, but now he is considering using put options. Johnson:
A)
may choose to use put options if he wishes to more perfectly hedge his portfolio than was possible with the forward contracts.
B)
may choose to use put options if he wishes to allow for upside potential on currency changes while hedging downside risk.
C)
may choose put options if he wishes to lower the upfront hedging costs from what he incurred using forward contracts.



Put options offer the type of benefit described in the answer. They allow the upside potential of a yen appreciation, but there is a cost at the initiation of the hedge not incurred with forward and futures contracts.

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Phil Johnson, CFA, is a portfolio manager in the United States and has implemented a delta hedge strategy using put contracts on his ₤2,000,000 security portfolio. The delta is -0.667, and Johnson used this value in composing his delta hedge using put contracts. The value of the pound increases from $2.00/₤ to $2.10/₤. If the delta hedge works perfectly, then the change in the value of each put on each British pound will be closest to a/an:
A)
decrease of $0.07.
B)
increase of $0.07.
C)
decrease of $0.03.



In dollar terms, the change in the exchange rate causes the value of the portfolio to increase by 5% or $200,000. Johnson would have purchased puts on ₤2,000,000. If the hedge is working perfectly, the put on each British pound would decline by approximatly $0.067, so $0.07 is the closest answer.
Delta = Change in option premium / Change in exchange rate
So, delta × change in exchange rate = change in option premium
-0.667 × $0.10 = -$0.07

TOP

Phil Johnson, CFA, is a portfolio manager in the United States and has been using a delta hedge strategy using $/€ put contracts on his €5,000,000 security portfolio. Johnson estimates the delta of the put contract to be -0.40, and Johnson used this value in composing his delta hedge. The $/€ exchange rate decreases from $1.25/€ to $1.2/€. The price of the put per Euro increases by $0.01. Based on this information, Johnson’s net position would:
A)
decline by $375,000.
B)
decline by $125,000.
C)
increase by $125,000.



Johnson would have purchased -1 / -0.4 = 2.5 put contracts for each Euro. The value of the portfolio would have declined by $250,000 = (1.25 − 1.2)($/€)(€5,000,000). The value of the put contract position will increase by $125,000 = ($0.01)(5,000,000)(2.5). Thus, the net change is a decline of $125,000.

TOP

Jill Pope, CFA, is a portfolio manager in the United States and has been using a delta hedge strategy using $/yen put conracts on her 10,000,000 yen security portfolio. The delta is 0.80. Other things equal, in dollar terms, a 0.100% decrease in the $/yen exchange rate would produce a:
A)
0.1% decrease in the security portfolio and a 0.125% increase in each put purchased.
B)
0.1% decrease in the security portfolio and a 0.080% increase in each put purchased.
C)
0.1% increase in the security portfolio and a 0.080% increase in each put purchased.



The decrease in the $/yen exchange rate will lower the value of the portfolio in dollar terms because each yen will be able to be converted to fewer dollars. The delta of an option is defined as its value change relative to the value change of the underlying. Thus, the options will increase by 0.8 times the percent decline in the $/yen exchange rate.

TOP

Bill Bender is a currency trader for International Investing Inc. International’s portfolio managers specialize in finding attractive international investments for U.S. investors. Bender reviews these transactions and determines whether to hedge away some of the risk, then takes the appropriate hedging action.
Tonight he will speak to several hundred students taking investment classes at a local college, discussing strategies for hedging currency risk. While eating lunch, he prepares the following talking points:
  • Options can be used to both directly and indirectly hedge currency risk. Futures can do the same.
  • Direct hedging of the principal with futures allows investors to hedge away risk, but not to participate in any currency gains.
  • A minimum-variance hedge is better than a simple hedge because it accounts for translation risk.
  • To avoid basis risk, investors should make sure their futures contracts mature at the end of the asset holding period.

The analysts were busy this morning, and upon his return from lunch, Bender had a stack of proposed trades to review.
The first transaction involves a series of long and short equity trades on a variety of foreign markets. While the trades generally wash out market risk, they make no allowance for currency fluctuations. The profit margin on such strategies can be low, so Bender must keep costs to a minimum. Bender creates a strategy to hedge away much of the risk.
Another analyst wants to take long positions in a variety of European small-cap companies. While the analyst is confident that the stocks will deliver returns superior to other European small-caps, he is concerned that decreases in the euro will erode the returns for U.S. investors. The analyst has provided Bender with the following data:
  • Portfolio value: €15 million.
  • Expected 12-month return: 26%.
  • Current exchange rate: $1.56 per euro.
  • Expected exchange rate in 12 months: $1.51 per euro.
  • Euro put premium: $0.065.
  • Delta: -0.58.

To compensate for this problem, Bender decides to use a currency delta hedge.
Bender then reviews another proposed transaction, the purchase of $10 million dollars of municipal-bond issue in Transylvania. The bonds pay 12 percent because the country’s credit rating is fairly weak. But the Transylvania analyst believes a recent regime change should stabilize the government, and the new leaders will take every precaution needed not to default on the bonds. Bender likes the investment, but has no idea what effect the recent coup is likely to have on Trannsylvanian currency, so he decides to fully hedge the principal and returns for the first year of the investment.
One analyst, Helen Carr, has asked for Bender’s assistance with a matter not related to currency hedging. Carr is not satisfied with the returns of her emerging-markets mutual fund. Her returns are not well correlated with the returns of the Europe, Australia, Far East Index.
Bender meets with Carr to discuss the benefits of emerging-market investments in general. Carr said it took several years to convince International Investments of the benefits of emerging-market investing, allowing that company executives put forth some compelling arguments for keeping out of such markets.
After Bender and Carr get to the specifics about how Carr can boost her returns, Bender suggests that she increase her exposure to small-cap emerging-market stocks. He says the purchase of such stocks will have several effects:
  • Increasing the portfolio’s return potential without sacrificing liquidity relative to large-cap emerging-markets stocks.
  • Decreasing the portfolio’s correlation with the Europe, Australia, Far East Index.
  • Making it easier to boost sector diversification relative to large-cap emerging-markets stocks.
  • Increasing the research complexity relative to large-cap emerging-markets stocks.
Assuming currency fluctuation and return expectations prove accurate and the price of a put option rises by $0.036 over the next 12 months, how many put options must Bender buy or sell a year from now to hedge the position?
A)
Buy 6,724,138 options.
B)
Sell 5,028,736 options.
C)
Buy 387,931 options.



To create the currency delta hedge, Bender must purchase the following put options: −1 / delta × portfolio value = 25,862,069 puts. Then we must calculate how many options to buy or sell a year from now. New delta = change in put option value / change in exchange rate = ($0.036) / (−$0.05) = −0.72. −1 / delta × portfolio value = number of options needed to hedge. −1 / −0.72 × €15,000,000 × 1.26 = 26,250,000 puts, or 387,931 more than the current holdings. (Study Session 14, LOS 35.g)

Which of Bender’s statements about small-cap emerging-markets stocks is least accurate? That they will:
A)
decrease the portfolio’s correlation with the Europe, Australia, Far East Index.
B)
make it easier to boost sector diversification relative to large-cap emerging-markets stocks.
C)
increase the portfolio’s return potential without sacrificing liquidity relative to large-cap emerging-markets stocks.



Small-cap emerging-markets stocks are likely to boost returns, but they are also considerably less liquid than large-cap emerging-markets stocks. Both remaining statements are accurate. (Study Session 12, LOS 30.b)

To accomplish his goals regarding the Trannsylvania investment, Bender should:
A)
sell $10 million worth of futures contracts.
B)
buy $11.2 million worth of futures contracts.
C)
sell $11.2 million worth of futures contracts.



To hedge currency risk on a foreign bond purchase, a trader could sell currency futures. In this case, a $10 million investment should be worth $11.2 million over a year. To fully hedge the principal and returns, Bender must sell futures contracts equal to the value of the principal plus the interest return, or $11.2 million. (Study Session 14, LOS 35.a)

Which of the following arguments against investing in emerging markets is least convincing?
A)
Over most of the last 20 years, annualized returns for emerging markets lagged those of U.S. investments.
B)
Over time, the correlation of emerging markets and that of developed markets is likely to increase.
C)
Emerging-markets stocks tend to lower returns and boost risk for global portfolios during bull markets in U.S. stocks.



Emerging-markets stocks tend to lower returns and add risk during U.S. bear markets – they tend to boost returns in bull markets. The other two concerns are legitimate. (Study Session 12, LOS 30.b)

Which of Bender’s talking points is least accurate?
A)
Options can be used to both directly and indirectly hedge currency risk. Futures can do the same.
B)
A minimum-variance hedge is better than a simple hedge because it accounts for translation risk.
C)
Direct hedging of the principal with futures allows investors to hedge away risk, but not to participate in any currency gains.



Simple hedges account for translation risk, while a minimum-variance hedge also addresses economic risk. The other statements are accurate. (Study Session 14, LOS 35.b)

To hedge away the basis risk for the long-short equity investment, Bender’s best option is a strategy:
A)
starting with options on the relevant foreign currencies.
B)
starting with a regression of U.S. returns of foreign currency futures.
C)
hedging the principal.



To correctly perform a cross-hedge, Bender should start with regression analysis of currency returns. A hedge of the principal won’t address the cross-currency issues. Put options may be an effective hedge, but purchasing that portfolio insurance requires up-front costs. If minimizing costs is key, options are not the answer. (Study Session 14, LOS 35.c)

TOP

When adding exposure to equities in a foreign market to your portfolio, which of the following strategies would offer the lowest amount of currency risk? In:
A)
the foreign derivatives market going short call options on an index on the foreign market.
B)
your domestic derivatives market going long call options on an index on the foreign market.
C)
your domestic derivatives market going long call options on an index on your domestic market.



You would want to go long call options on the foreign index. You can choose to purchase calls on the index and would only have the initial premium committed (i.e., exposed to translation risk). Further, you may find the desired call options traded on your domestic exchange. In this case, translation risk is totally eliminated, because the premiums are stated in your domestic currency.

TOP

When adding exposure to equities in a foreign market to your portfolio, which of the following strategies would offer the lowest amount of currency risk? In:
A)
the foreign futures market going short index futures on an index on the foreign market.
B)
your domestic futures market going long index futures on an index on the foreign market.
C)
your domestic futures market going long index futures on an index on your domestic foreign market.



You would want to go long futures on the foreign index. You can choose to go long foreign equity index futures and would only have the initial margin committed (i.e., exposed to translation risk). Further, you may find the desired index future traded on a domestic exchange. In that case, currency exposure is totally eliminated, because prices (including margins) are stated in your domestic currency.

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