說明v1 level iii exam morning questions mock55模考一題目

LevelⅢ–MockMOCKEXAMQuestionLevelⅢ–MockMOCKEXAMQuestion1-6relatedtoMostfinancialservicesregulatorybodiesinEastAfricaaremovingtowardrisk-basedsupervisionmodels.MiriamBukenya,CFA,istheheadofcomplianceatJacarandaAssetManagement,amanagerofbothretailandinstitutionalportfolios.Sheiscurrentlyrevisingthecompany'scompliancepoliciestoaddressriskinallareasofJacaranda'sbusinessandischeckingdifferentaspectsofthefirmtoensurethatitwillbeabletomeetnewrisk-basedsupervisionregulationswhentheybecomeeffectiveinsixmonths.ThefirmrecentlyadoptedtheCFAInstituteCodeofEthicsandStandardsofProfessionalConductasitsowncodeandstandards.WhilereviewingJacaranda'scompliancemanual,Bukenyarealizesitneedsafewchangestocomplywiththenewrisk-basedregulations.Toensurethatshefollowsbestpractice,sheconsultswithLucRemmy,CFA,theheadofcomplianceatherformeremployer,MercuryAdvisoryServices.Remmy,whonowrunsanindependentconsultingfirm,e-mailsBukenyathecompliancemanualheusesforhisownfirm.Whilereviewingthecompliancemanual,Bukenyanoticesthatmanysectionslookfamiliar.Shefindsastatementinthedocumentindicatingitisforthe"soleuseofMercuryAdvisoryServices."Whenquestioned,RemmystatesthatheonlyusedthetableofcontentsofMercury'sdocumentbutnoneoftheothercontentinthedocumenttodevelophiscompliancemanual.BukenyalooksatthemarketingmaterialsJacarandausestocommunicatewithexistingandprospectiveclientstoensurethateverythingmentionedinthematerialisfactualandcomplieswiththeCFAStandardsofProfessionalConduct.Thefollowingmarketingstatementsareexamined:Statement1Jacarandalooksforinvestmentsofferingintrinsicvaluethroughatop-downapproach,includingareviewofforecastsofeconomicandindustryperformance.Weevaluatehistoricalandprojectedcompanyfinancials,performextensivefinancialratioanalysis,conductmanagementinterviews,anddeterminetargetpricesusingavarietyofvaluationmodels.Statement2Jacarandamay,attimes,hireoutsideadviserstomanagerealestateholdingsonbehalfofclients.Theseadvisershavethenecessaryexpertisetomanagepropertyassets.Statement3JacarandahasfourCFAcharterholdersamongitsseniormanagement.TheirparticipationintheCFAProgramhasenhancedtheirinvestmentmanagementskills.Allofthesemanagerspassedthethreeexamsintheshortesttimepossible.Thenewrisk-basedregulationsalsorequireaccurateandcompleteperformancepresentations,withalldiscretionaryaccountsincludedinatleastonecomposite.BukenyabelievesJacaranda'sperformancepresentationpolicymeetsthesenewrequirementsaswellastheCFAInstituteStandardsofProfessionalConductbecauseJacaranda'ssinglecompositeincludesallcurrentandterminatedclientaccountsandpresentationsincludethefollowingstatement:"Detailedinformationregardingtheperformancepresentationisavailableonrequest."AlthoughJacarandadoesnotcurrentlycomplywithGIPSstandards,Bukenyaencouragesthefirmtodosowithinthe2-LastName: FirstName: Date: LevelⅢ–MocknextfewBukenyaLevelⅢ–MocknextfewBukenyathenreviewsJacaranda'srecord-keepingpolicy.Currently,thepolicyrequiresretentionofhardcopiesofallsupportingdocumentationforinvestmentrecommendationsanddecisionsmadeduringthelastfiveyears.Thispolicymeetsthenewrisk-basedregulations.Clientmeetingminutesandcommunicationlogsarekeptelectronicallyandbackeduponaremoteserver.Fundmanagersandresearchanalystsareresponsibleformaintainingtheirownpersonalnotesandresearchmodels.ThispolicyalsoappliestoJacaranda'sindependentresearchcontractor,MathewOchieng,who(forsecurityreasons)doesnothaveaccesstothecompany'sserver.Ochieng,whoonlyundertakesresearchforJacaranda,sendshisresearchreportstotheheadofresearch,whothenarchivestheseelectroniccopies.WhilereviewingJacaranda'scounterpartyriskpolicy,BukenyadiscoversthattraderJacksonGaterarecentlyconvincedthebackofficetooverridecontrolsdesignedtopreventoverexposuretospecificstockbrokers.Thisrequestwasinviolationofcompanyrules.Therulesstatethatifthetradingallocationtoaspecificbrokerisbreached,tradingthroughthatbrokermustbesuspendeduntiltheexposuredropstowithintheexposurelimits.TheCounterpartyRiskCommitteepredeterminestheselimits.Thenewrisk-basedregulationsalsorequirecompaniestogatherclientinformationaspartofknow-your-clientandanti-money-launderingprocesses.Bukenyacreatesaconfidentialitypolicyrestrictingaccesstoexistingandprospectiveclientinformation.Theinformationisonlyavailabletopersonnelwhoareauthorizedbytheexistingorprospectiveclient.Theoneexceptionisiftheclientorprospectiveclientisthoughttobeconductingillegalactivities.Inthiscircumstance,theinformationcanbereleasedwithoutauthorizationiftheinformationisdemandedthroughacourtorderorotherlegal1.WhichofthefollowingCFAInstituteStandardsofProfessionalConductdidRemmylikely2.WhichmarketingstatementshouldBukenyamostlikelyrevisetoconformtotheCFAStandardsofProfessionalStatementStatementStatement3.DoesJacaranda'sperformancepresentationpolicymostlikelymeetrecommendedforcomplyingwithCFAInstituteStandardsofProfessionalNo,becauseofthestructureoftheNo,becauseitisnotincompliancewithGIPSstandards4.Jacaranda'srecord-keepingpolicyismostlikelyinviolationofStandardV(C):Retentionwithregardto3-LevelⅢ–MockretentiontimeretentionLevelⅢ–Mockretentiontimeretentionofpersonalnotesandresearchmodels.keepingofhardandelectroniccopies.5.InresponsetoGatera'sactions,BukenyashouldleastlikelyrecommendwhichoftheactionstopreventviolationsoftheCFAInstituteStandardsofProfessionalReportGateratoCFAInvestigatefurther6.DoesBukenya'sconfidentialitypolicyYes,withregardtoclientYes,withregardtotypeofinformation4-LevelⅢ–MockQuestion7-12relatedtoCapitalMarketTheUnitedStates-basedCMEFoundationservesawidevarietyofhumaninterestcausesinruralareasofthecountry.Thefund’sinvestmentpolicystatementsetsforthallocationrangesformajorassetclasses,includingU.S.large,mid-,andsmall-capLevelⅢ–MockQuestion7-12relatedtoCapitalMarketTheUnitedStates-basedCMEFoundationservesawidevarietyofhumaninterestcausesinruralareasofthecountry.Thefund’sinvestmentpolicystatementsetsforthallocationrangesformajorassetclasses,includingU.S.large,mid-,andsmall-capstocks,internationalequities,anddomesticandinternationalWhenrevisingitsoutlookforthecapitalmarkets,CMEtypicallyappliesdatafromGloboStatsResearchontheglobalinvestablemarket(GIM)andmajorassetclassestoproducelong-termestimatesforriskpremiums,expectedreturn,andriskmeasurements.AlthoughtheyhaveworkedwithGloboStatsformanyyears,CMEisevaluatingtheservicesofRiteVal,acompetingresearchfirm,viaatrialoffer.UnliketheequilibriummodelingapproachappliedtoGloboStats’sdata,RiteValpreferstouseamultifactormodelingapproach.Bothresearchfirmsalsoprovideshort-andlong-termeconomicCMEhasaskedPaulineCortez,chiefinvestmentofficer,toanalyzethebenefitofaddingU.S.realestateequitiesasapermanentassetclass.Todeterminetheappropriateriskpremiumandexpectedreturnforthisnewassetclass,Cortezneedstodeterminetheappropriateriskfactortoapplytotheinternationalcapitalassetpricingmodel(ICAPM).SelecteddatafromGloboStatsisshowninExhibitExhibitCortez’scolleagueJasonGreynotesthatU.S.realestateisapartiallysegmentedmarket.Forreason,GreyrecommendsusingtheSinger-TerhaarapproachtotheICAPMandassumesacorrelationof0.39betweenU.S.realestateandtheGIM.CortezreviewsRiteValdata(Exhibit2)andpreferredtwo-factormodelwithglobalequityglobalbondsasthetwocommondriversofreturnforallotherasset5-AdditionalRisk-freerate:ExpectedreturnfortheGIM:AssetwithGIMwithGIMSharpeU.S.realGlobalinvestableLevelⅢ–MockExhibitGreymakesthefollowingobservationsaboutthetwodifferentapproachestheresearchfirmsLevelⅢ–MockExhibitGreymakesthefollowingobservationsaboutthetwodifferentapproachestheresearchfirmstocreatetheirrespectivecovariance??GloboStatsusesahistoricalsampletoestimatecovariances,RiteValusesatargetcovariancematrixbyrelatingassetclassreturnstoaparticularsetreturnGreyrecommendschoosingtheGloboStatsCortezstates:Idisagree.WewillusetheresultsofbothfirmsbycalculatingaweightedforeachcovarianceGreyfindsthatRiteVal’seconomiccommentaryrevealsanon-consensusviewoninflation.Specifically,theybelievethatanear-termperiodofdeflationwillsurprisemanyinvestorsbutthatthecurrentcentralbankpolicywilleventuallyresultinareturntoanequilibriumexpectedlevelofGreystates:IfRiteValiscorrect,inthenear-termourincomeproducingassets,suchasTreasurybondsandrealestate,shoulddowellbecauseoftheunexpectedimprovementinpurchasingpower.Wheninflationreturnstotheexpectedlevel,ourequitiesarelikelytoperformCortezpointsoutthatRiteValusesaneconometricsapproachtoeconomicanalysis,whereasGloboStatsprefersaleadingindicator-basedapproach.CortezandGreydiscusstheseatCortezcomments:Thebigdisadvantagetotheleadingindicatorapproachisthatithasnothistoricallyworkedbecauserelationshipsbetweeninputsarenotstatic.Onemajoradvantagetotheeconometricapproachisquantitativeestimatesoftheeffectsontheeconomyofchangesinexogenous7.UsingthedataprovidedinExhibit1andassumingperfectmarkets,thecalculatedbetaforU.S.realestateisclosestto: 6-AdditionalCorrelationbetweenglobalequitiesandglobalbonds:FactorAssetGlobalGlobalResidualRiskU.S.realestateGlobaltimberLevelⅢ–Mock 8.UsingthedataLevelⅢ–Mock 8.UsingthedataprovidedinExhibit1andGrey'srecommendedapproachandcorrelation,theexpectedreturnforU.S.realestateisclosest9.UsingthemultifactormodelpreferredbyRiteValandExhibit2,thestandarddeviationofrealestateisclosest10.Cortez’sstatementtousetheworkofbothfirmstodetermineacovarianceestimateislikelyanexampleaprudencetrap.11.Grey’sstatementregardingtheimpactofRiteVal’sinflationscenarioismostincorrectbecauseofhiscommentaboutrealincorrectbecauseofhiscommentabout12.Cortez’scommentwithregardtothetwodifferentapproachestoeconomicanalysisismostincorrectbecauseofthestatementregardingleadingincorrectbecauseofthestatementregarding7-LevelⅢ–MockQuestion13-18relatedtoMcMorrisAssetManagement(MCAM)isaninvestmentadviserbasedinAtlanta,Georgia.TomMorrismanagestheactiveequityportfolios.DanMcKeenmanagesthesemiactiveequityportfoliosandthesemiactivederivativesportfolios.TheyarepreparingLevelⅢ–MockQuestion13-18relatedtoMcMorrisAssetManagement(MCAM)isaninvestmentadviserbasedinAtlanta,Georgia.TomMorrismanagestheactiveequityportfolios.DanMcKeenmanagesthesemiactiveequityportfoliosandthesemiactivederivativesportfolios.TheyarepreparingtomeetwithMaggieSmith,thechiefinvestmentofficerofPhilaburghCapital,whoisconsideringhiringMCAMtoreplaceoneofitscurrentmanagers.Atthemeeting,MorrisandMcKeendiscussMCAM’sinvestmentapproacheswithSmithandpresentherwiththeriskandreturncharacteristicsdetailedinExhibit1.Exhibit1:SummaryInformationforMCAM’sInvestmentSmithasksifMCAM’sactiveequitystrategyislongonly.McKeenrespondsthatMCAMmarket-neutrallong–shortstrategiesforseveralreasons.Heindicatesthatlong–shortReasonReasonReasonenhanceportfolioperformancebyincreasingthegeneratealphabyidentifyingundervaluedorovervaluedbenefitfromeventsthatgiverisetopricechanges,whicharemoreprevalentonshortsidethanonthelongSmithconsiderseachapproachlistedinExhibit1butisuncertainaboutwhatwouldbeaninvestmentstrategy.ShemakesthefollowingcommentsaboutmarketCommentAfirm’sstockpricedoesnotreflectallpubliclyavailablecompanyinformation,andgoodresearchcanuncoversoundinvestmentopportunities.Philaburgh’smandateisformanagerstolimitvolatilityaroundthebenchmarkreturnwhileprovidingincrementalreturnsthatexceedmanagementCommentSmithstates,―Inordertoensureinvestmentdiscipline,Philaburghusestwomethodstoevaluateaninvestmentmanager’sstyle.‖ShethenreviewsthecurrentcharacteristicsofMCAM’sactiveequityapproachusingthefirstmethod,aspresentedinExhibit2.Exhibit2:Method1—PortfolioCharacteristicsforMCAMActiveEquityStrategyBasedCurrent-PeriodSmiththenselectsthreebenchmarks—value,blend,andgrowth—inadditiontothebenchmarktoassessthemanager’sstyleusingthesecondmethod,aspresentedinExhibit8-ActiveNumberofMarket$180$4,400Weightedaveragemarket$4.0$4.1DividendActiveSemiactiveSemiactiveTrackingInformationExpectedLevelⅢ–MockExhibit3:Method2—ReturnCorrelationsbetweenMCAM’sActiveEquityApproachBenchmarksBasedonLevelⅢ–MockExhibit3:Method2—ReturnCorrelationsbetweenMCAM’sActiveEquityApproachBenchmarksBasedon36MonthsofHistoricalSmithindicatesthatPhilaburgh’sperformancemeasurementiscompliantwiththeGlobalInvestmentPerformanceStandards.Inconsideringinvestmentperformance,MorristhreerisksthatmaypreventMCAM’sactiveequityapproachfromgeneratingincrementalRiskRiskRiskOverestimatingastock’searningspershareDecidingincorrectlythatastock’searningsmultiplewouldnotMisjudgingwhetherastock’sundervaluationwillcorrectwithintheinvestmentSmithconcludesbytellingMorristhatsheisimpressedbyMCAM’strackrecordinaddingalphaintheUSstockmarket.However,shebelievesthattheEuropeanequitymarketsarelikelytooutperformtheUSequitymarketsoverthenextfiveyears.SheaskswhetherMCAMcanstructureaportfoliotocapturebothopportunities.Morrisofferstocombinehislong–shortactiveequitystrategywithaEUROSTOXX50Index13.BasedonExhibit1,theapproachthatisleastlikelyefficientwithrespecttodeliveringreturnsforagivenleveloftrackingrisksemiactiveactiveequity.McKeen'sresponsetoSmith'squestionaboutMCAM'sactiveequitystyleisleastcorrectwithrespectReasonReasonReasonSmith'sComment1andComment2,respectively,aremostlikelyconsistentwithinvestmentstylethatComment1semiactive;Comment2Comment1active;Comment2Comment1active;Comment216.BasedonExhibits2and3,whatcanSmithmostlikelydetermineaboutMCAM'sstyleovertime?MCAM'sstylenotdriftedfromvaluetogrowth.driftedfromgrowthto9-CoefficientofLevelⅢ–Mock17.WhichLevelⅢ–Mock17.WhichoftherisksMorrisidentifieswithrespecttoMCAM'sactiveequitystrategyislikelyapplicabletoagrowth-orientedRiskRiskRiskThetypeofportfoliothatMorrisrecommendstoSmithtotakeadvantageofbothUSEuropeanequitymarketopportunitiesismostlikelycoresatellite.10-LevelⅢ–MockQuestion19-24relatedtoFixedVirginiaNorfolk,CFA,isheadoftheclientstrategycommitteeatChesapeakePartners,LLC,aninvestmentconsultingfirm.Chesapeakeadvisesadiverseclientbaseonavarietyofinvestmentmattersincludingassetallocationandmanagerselection.Eachmonththecommitteemeetstodiscussclientinquiriesandassignmentstheconsultantsareworkingon.Norfolkconvenesthecommitteetodiscusspressingissuesforseveralclients.NorfolkasksWilliamBurg,afieldconsultant,topresentonanewclient,asmallcollegethatChesapeakeadviseswithregardtotheirpensionfundandendowment.Burgneedstorecommendtotheclientanappropriatebenchmarkforeachfund.Burgtellsthecommittee,"Irecommendthatthepensionfundbenchmarkbechangedfromthepension'sliabilitiesasthebenchmarktoabondmarketindex.Thepensionisclosedtonewparticipantsandthustheamountandtimingoffuturecashflowsareknown.Theendowmentisinvestedacrossmanyassetclassesandgenerateanadequatereturntomeetitsobligations,whichconsistsofa5%annualcontributiontothecollege'soperatingfund.Theendowment'sbenchmarkforfixed-incomemanagersshouldcontinuetobeabondmarketindex,suchasBarclaysAggregateBondIndex."AlexManassas,acommitteemember,asksBurg,"Whatfactorsdoyouconsiderinselectingabenchmarkbondindex?"Burgresponds,"Ilookatthreekeyfactorswhenselectingabenchmark.Marketvalueriskshouldbesimilarfortheportfolioandthebenchmark.Thelongertheduration,thegreaterthetotalreturnpotentialLevelⅢ–MockQuestion19-24relatedtoFixedVirginiaNorfolk,CFA,isheadoftheclientstrategycommitteeatChesapeakePartners,LLC,aninvestmentconsultingfirm.Chesapeakeadvisesadiverseclientbaseonavarietyofinvestmentmattersincludingassetallocationandmanagerselection.Eachmonththecommitteemeetstodiscussclientinquiriesandassignmentstheconsultantsareworkingon.Norfolkconvenesthecommitteetodiscusspressingissuesforseveralclients.NorfolkasksWilliamBurg,afieldconsultant,topresentonanewclient,asmallcollegethatChesapeakeadviseswithregardtotheirpensionfundandendowment.Burgneedstorecommendtotheclientanappropriatebenchmarkforeachfund.Burgtellsthecommittee,"Irecommendthatthepensionfundbenchmarkbechangedfromthepension'sliabilitiesasthebenchmarktoabondmarketindex.Thepensionisclosedtonewparticipantsandthustheamountandtimingoffuturecashflowsareknown.Theendowmentisinvestedacrossmanyassetclassesandgenerateanadequatereturntomeetitsobligations,whichconsistsofa5%annualcontributiontothecollege'soperatingfund.Theendowment'sbenchmarkforfixed-incomemanagersshouldcontinuetobeabondmarketindex,suchasBarclaysAggregateBondIndex."AlexManassas,acommitteemember,asksBurg,"Whatfactorsdoyouconsiderinselectingabenchmarkbondindex?"Burgresponds,"Ilookatthreekeyfactorswhenselectingabenchmark.Marketvalueriskshouldbesimilarfortheportfolioandthebenchmark.Thelongertheduration,thegreaterthetotalreturnpotentialbecauseratesarelownowandtheyieldcurveissosteep.Incomeriskisimportantforcomparableassuredincomestreams,whichcanbemorestableanddependableinaportfoliowithlongmaturities.Theaveragecreditriskinthebenchmarkshouldbemeasuredagainsttheinvestor'soverallportfolioandsatisfycreditqualityconstraintsinthepolicystatement."BorisMarkov,CFA,isthefirm'sactuaryandexpertonassetliabilitymanagement.Hisclientisalifeinsurancecompanythatsellsguaranteedinvestmentcontracts(GICs).ThecompanyhiredChesapeakebecauseithasnotmetthetargetyieldof4%ontheGICsitsold.Markovproposesanewapproachtosatisfytheobligation:"First,thenewsingle-periodimmunizationstrategyshouldrequireasaminimumconditionthatthedurationofthebondportfolioequaltheinvestmenthorizon.Inaddition,ifthebondportfoliohasayieldtomaturityequaltothetargetyieldandamaturityequaltotheinvestmenthorizon,thenthetargetvaluewillbeachieved".Markovthendiscussesanotherclientthatwillrequirearebalancingofitsportfolioafterashiftininterestratesoverthelastyeartomaintaintheinitialdollarduration.HeusesthedatainthetablebelowtoexplaintothecommitteehisrebalancingExhibitDataforInitialPortfolioandafterInterestRateJuanRamirez,CFA,Chesapeake'schiefinvestmentofficer,bringsforwardtothecommitteeInitialPortfolioafterRateShiftoverOneMarketMarketBondBondBondLevelⅢ–Mockinvestmentissuesthathewouldliketodiscuss.Ramireztellsthecommittee,"Someofourclient'sportfoliosareforthepurposeofLevelⅢ–Mockinvestmentissuesthathewouldliketodiscuss.Ramireztellsthecommittee,"Someofourclient'sportfoliosareforthepurposeoffundingliabilities,andIamconcernedthattheseliabilitieswillnotbemet,givencertainrisks.Inparticular,Ihavenoticedthatclientportfolioshaveasubstantialpositioninmortgaged-backedsecurities.Weshouldreallocatethesesecuritiestoinvestincorporatebondssotheportfolio'sconvexitymatchesthatoftheliabilities."Ramirezthenpresentsthecommitteewiththesecondinvestmentissue.HeisfocusedonapresentationthatAlphaManagers,aninvestmentfirmthathopestomakeitontoChesapeake's"buylist,"maderecently.Hetellsthecommittee,"Iamperplexedbythebottom-upcapabilitythatAlphaclaimstohaveinaddingvaluetoportfolios.Theyclaimtohaveabiastoyieldmaximizationacrosssecuritieswithoutregardtorating19.IsBurgcorrectwithregardtohisrecommendationstothecommitteeregardingforthepensionandendowmentPension:Correct,Endowment:CorrectPension:Incorrect,Endowment:Pension:Correct,Endowment:20.Burg'sstatementregardingthefactorsheusesinselectingabenchmarkbondindexiscorrectregardingmarketriskandincorrectregardingincomerisk.incorrectregardingcreditriskandincorrectregardingmarketincorrectregardingmarketriskandcorrectregardingincome21.IsMarkovcorrectregardingthenecessaryconditionstoimmunizetheGICportfolioforNo,heisincorrectregardingthebondportfoliocharacteristicsNo,heisincorrectregardingduration22.UsingdollardurationandthedatainExhibit1,howmuchcashdoesMarkov'sclientneedrebalancetheportfolio,assumingnewinvestmentsareinequalproportionsofone-thirdofeach23.TheriskthatRamireznotesisprevalentinclientportfoliosismostinterestraterisk.cap12-LevelⅢ–MockLevelⅢ–Mock24.Ramirezmostlikelycriticizestherelative-valuemethodologythatAlphausestoadditbetterreflectsatop-downapproachtoportfoliomanagement.atotalreturnapproachisafarsuperiorframework.itbetterreflectsastructure13-LevelⅢ–MockQuestion25-30relatedtoFixedTylerAustinisaLevelⅢ–MockQuestion25-30relatedtoFixedTylerAustinisafixed-incomeportfoliomanageratLaredoAdvisers.Hemanagesa$1billionfundthatopportunisticallyseeksthebestideasacrossfixed-incomemarkets.HemeetsdailywithOdessaHouston,thefund’ssenioranalysttodiscusstradeideasthatmightbeimplementedthatday.AustinhasidentifiedsixideasthathewouldlikeHoustontoevaluateinmoredetailforpotentialinclusionintheAustinnotesthatthecurrentlowlevelofinterestratesislimitingthepotentialabsolutereturnthefundgenerates.HeasksHoustontoevaluatetheuseofleveragetoenhancereturns.Hecanborrow25%ofthefund’svalueatanannualinterestrateof1.50%andearnarateofreturnof5%peryearontheinvestedHoustonsuggeststhatanotherwaytouseleverageintheportfolioisthroughtheuseofagreements(repos).ShemakesthreestatementstoAustinregardingtheuseofStatement Reposoftenhavematuritydatesasshortasovernightbutcanprovidepermanentleverageby―rollingover‖theStatement Thereareavarietyofmechanismsfortransferringthesecuritiestothebuyer.example,acustodialbankcantakepossessionofthesecuritiesandensurethatbothparties’interestsareserved.Thistransactiontendstohavealowercostthanothertransferarrangements.Statement Thereporatewillbelowerthehigherthequalityofthecollateral,theshortermaturity,andthehighertheavailabilityofthesecuritybeingAustintellsHoustonthatheisconcernedaboutthepotentialforratestoriseandwantstoexplorehowthefund’sdurationcanbechangedusingthefuturesmarket.Thefundcurrentlyhasadurationof5,andhewouldliketoeliminateallinterestraterisk.HoustonusesthedatainExhibit1forherExhibit1FuturesMarketAustinisintriguedbytheincrementalyieldhecouldearnbybuyinganItaliansovereignbond.Adealerprovidesaquoteataspreadof350bpsoverUSTreasuriesfora5%coupon,10-yearmaturityItalianBuonidelTesoroPoliennale(BTP)bondwithadurationof6.75.HeasksHoustontoassesshowmuchthisbondspreadcouldwidenoverthesix-monthperiodheintendstoholdthebondbeforetheyieldadvantagerelativetoTreasurieswouldbeAustinalsoasksHoustonwhethertheeuro-denominatedbondstheybuyshouldbehedgedback14-FuturescontractConversionDurationofcheapest-to-deliver(CTD)Marketpriceofcheapest-to-deliverLevelⅢ–MocktheUSdollar,thefund’sdomesticcurrency.HoustonrespondsthattheyshouldhedgebacktotheUSdollarbecauseshort-terminterestratesare2.50%intheeurozoneand0.25%intheUnitedStates,andherforecastshowsthatsheexpectstheeurotodepreciateby1.75%relativetotheUSThereareUS-denominatedandeuro-denominatedbondsinthefund;therefore,Austinwonderswhetherthefund’sdurationisstillsimplyanaverageofthedurationsofeachbond.Houstoncomments,InenanainterestratesLevelⅢ–MocktheUSdollar,thefund’sdomesticcurrency.HoustonrespondsthattheyshouldhedgebacktotheUSdollarbecauseshort-terminterestratesare2.50%intheeurozoneand0.25%intheUnitedStates,andherforecastshowsthatsheexpectstheeurotodepreciateby1.75%relativetotheUSThereareUS-denominatedandeuro-denominatedbondsinthefund;therefore,Austinwonderswhetherthefund’sdurationisstillsimplyanaverageofthedurationsofeachbond.Houstoncomments,Inenanainterestratesarenotperfectlycorrelated.Currently,thefundhas80%oftheportfolioinUSissuerswithanaveragedurationof5.5andtheremainderinGermanissuerswithanaveragedurationof3.5.Historically,thecountrybetaofGermany(i.e.,forGermanratesrelativetoUSrates)isestimatedtobe25.IfAustinusesleverageasheproposes,therateofreturnontheportfolio’sequitywillclosest26.WhichofHouston’sstatementsregardingrepurchaseagreementsisleastlikelyStatementStatementStatementBasedonExhibit1,thenumberoffuturescontractsAustinneedstoselltoeliminateinterestrateriskintheportfolioisclosest28.GivenAustin’stimehorizon,theamountbywhichspreadsforBTPbondscouldwidentheiryieldadvantagerelativetoTreasurieswouldbeeliminatedisclosest265237BasedonHouston’sforecastfortheeurorelativetotheUSdollar,andassuminginterestparityholds,shouldAustinmostlikelyhedgetheportfolio’seuroexposureusingNo,becausetheeuroisexpectedtodepreciatebymorethanimpliedbytheforwardcontractsNo,becausetheeuroisexpectedtodepreciatebylessthanimpliedbytheforwardBasedonHouston’scommentregardinginternationalinterestrates,thecontributiontoportfolio’soveralldurationfromGermanbondsisclosest15-LevelⅢ–MockLevelⅢ–Mock16-LevelⅢ–MockQuestion31-36relatedKamikoWatanabe,CFA,isaportfolioadviserLevelⅢ–MockQuestion31-36relatedKamikoWatanabe,CFA,isaportfolioadviseratWakasaBaySecurities.ShespecializesintheuseofderivativestoalterandmanagetheexposuresofJapaneseequityandfixed-incomeShehasmeetingstodaywithtwoclients,IsaoSatoandReikoSatoisthemanageroftheTsushimaManufacturingpensionfund,whichhasatargetassetallocationof60%equityand40%bonds.Thefundhasseparateequityandfixed-incomeportfolios,whosecharacteristicsareprovidedinExhibits1and2.Satoexpectsequityvaluestoincreaseinthecomingtwoyearsand,inordertoavoidsubstantialtransactioncostsnowandintwoyears,wouldliketousederivativestotemporarilyrebalancetheportfolio.Hewantstomaintainthecurrentbetaoftheequityportfolioandthecurrentduratio