CFAI sample 2 question 12 question, course, create

meghanjackson

Did this freak anyone else out? I had no idea how to calculate it. Schweser of course said we didn’t need to know any calcs on how to create a two bond hedge, but here one is in the sample. Do you guys know this stuff?

Micholien

Ditto Spud (& Plyon on another thread). WTF is going on here? The questions are exactly the same, no reference to which one to use - is there an answer to this?

lucasg85

Your logic to each of those question makes complete sense.
BUT how on earth do you know in question number one that he using a treasury future and in the last question they are using a two bond hedge? From what I see, the item set is exactly the same and the questions are exactly the same. It doesn’t say anywhere which one they are using for which question?!

Kiakaha

spud, in question number one he is using a sole treasury futures contract to hedge.
in the last question of the item set, they show a duration hedge and a two bond hedge. to correctly hedge the GNMA and account for the negative convexity you need to use the two bond hedge.
If you use the two bond hedge while holding the GNMA, you’ll notice that the difference between the two is -.074. This is essentially your cost of performing the hedge. You earn a spread of 168 basis points on the GNMA annually or 168/12 = 14 bps per month and therefore you are able to cover the costs of the hedge.
Make sense?

mfleming1983

Well at least they only charge half the second time around.

thommo77

This is the sh!t that pisses me off. I would MUCH rather Schweser cover more stuff than be all selective about sh!t and throw out the old “oh, hmm you don’t need to know any of this.”
Seriously, what bullsh!t. It seems like 1/4 of the stuff I’ve come across on the CFAI samples and mock exams are things that Schweser specifically went out of their way to say we don’t have to know. WTF?
It’s like they want people to do good enough to feel like their study notes helped, but not good enough that everyone passes. Think about it… How much more $$ does Schweser make on people that pass the exams in 5 tries compared to those going 3/3? They have incentive to not teach this stuff very well.

Siddimaula

I agree with u NG30, how can it be the cost. I guess that difference -7.4 is the convexity effect.

BC_MBA_student

i gotcha. thanks for your patience and understanding. ha…not too with it these days

cfalevel2011

no, i mean Schweser says calcs on determining % to hedge with each bond isn’t on the exam.
this example was definitely not that however as the hedge had already been determined (or one of 2 options)

spartanag07

i don’t think they asked for that anywhere on sample 2… then again even though i just took it i can’t even comprehend what you’re saying, so i’m going to say it’s my fault.