tt501916

"unexpected inflation" is referred to underlying asset here. "hedge" is defined as instrument that can attain negative movement with the underlying asset (from the CFA texbook). so when asset goes up, hedge instrument must go down in order to achieve the hedging purpose. i.e. negative correlation.

I am sorry to tell for most of you but the answer is definitely negative corelation. Answer: -0.3

tt501916

FOF (Fund of fund) does not or is least likely to need "due diligence", read from textbook. So the answer is B: due diligence.

tt501916

回复 247# tyggt001


You won't get such conclusion if you are thinking like that.
Textbook Reading 18. Capital Market Expectation p.63 reads clearly that different asset classes ( Cash, bond, and equity) move differently in accordance with "inflation above expectation" and "infation below expection. Particularly, if you are talking about "inflation above expectiation, effect to Equity class is NEGATIVE, So the concept is somewhat different from what we heard traditionally in our "daily" life.

However, the question haven't mentioned what kind of asset class does the client want to hedge. So you cannot give any answer if you sort out like that.

The most possible way to solve it is to let inflation be a "underlying asset", and hedge should be always negative.

tt501916

回复 250# CFANS


   Please read reading 18. Capital market expectation P.63. different asset classes move differently in accordance with "inflation above expection" and "inflation below expectation"

Inflation above expectation is + to cash, - to equity & bond.
Inflation below expectation is neutral to cash & bond, + to equity.

How do you hedge then if the question hadn't tell you what is the asset class?

tt501916

回复 253# CFANS

that is why i said you can't explain nothing if you are thinking the issue in a "traditional" way.

And my suggestion is to back to earth. i.e. what is "hedge"?

tt501916

回复 258# greenturtle


So you are correct if the question is written as " which is most appropriate instrument to protect his/her purchasing power"
However, the question is asking you about hedge, not protection.
The two meanings are similar but are completely different.

For example:

If i am a crazy guy with all my asset in gold (not cash), what is a good hedge under unexpected inflation?

If i am a Chinese guy with only 10% of cash denominated in RMB but the rest of cash exchanged to US$, and i want to live my retirment in CHina. What is a good hedge of my US$ under unexpected inflation of US market?  

If the client (in the question) holds majority of asset in form of equity (inflation-linked? according to your assumption?), what is a good hedge?


All in all, why do you hedge negatively in the currency rate and bonds question, but want to "hedge" positively only in this question? This is a very big trap.

tt501916

回复 260# tt501916


    think in another way again.

if the question is changed to "unexpected DEFLATION" ,which is a good hedge?
It must be an instrument with negative correlation with the environment.  

Purpose of HEDGE is not because you want to protect your purchasing power, but because you want to maintain your portfolio value stable no matter unexpected deflation happen or not.

tt501916

回复 267# dmy949


    But i remember the question was " which is least likely the problem"

tt501916

回复 271# CFANS



Anyway. my point is there must be someone who are happy with "unexpected inflation". Financial market is always a zero sum game.
If you lose because you fail to the protect (or "hedge" in your terms) for inflation, there must be someone in this world whose profit is positive.

you expect an "unexpected inflation" so you buy something with positive correlation, then you are just increasing your leverage but not hedge.
I have quoted so many examples, but you dare not to drill into the definition of "hedge".

In fact, the term "unexpected" has given you some hint.

tt501916

回复 323# dmy949


    yes. i remember the question required a very long calulation and you just need to calculate with no shortcut. need to calculate the combined portfolio sd and r first