Questions 25 to 30 relate to Fixed Income
Sasha Ruiz Case Scenario
Sasha Ruiz is a fixed income analyst serving a US based portfolio management firm.
Ruiz is analyzing the firm’s international bond portfolio paying particular attention to 10-
year government bond holdings. She has compiled data with respect to bond yields and
durations in an exhibit (Exhibit 1). Using a forecast horizon of twelve months, Ruiz will
be performing breakeven spread analysis to determine if the yield advantage of an
investment in 10-year U.S. Treasury bonds persists if any of the following forecasts
materializes:
I. UK yield increases by 8 bps.
II. Australian yield decreases by 10 bps.
III. Japanese yield remains constant.
Exhibit 1:
Breakeven Spread Analysis Data
UK Australia Japan US
9.9 6.5 10.3 8.6
10-year government bond yield
(%)
Duration 7.4 9.4 8.7 12.5
Ruiz intends to summarize the results of her analysis in a report which will be distributed
to the firm’s fixed income portfolio managers. She opens her report with the statement,
“While breakeven analysis is useful in quantifying the requisite spread widening to
diminish a yield advantage, it is limited in its application in the case of emerging market
debt and when exchange rate risk is high.”
Neil Young is managing the portfolio of Ester Corp’s defined benefit pension fund
comprising of US corporate and government bonds. Concerned about an adverse shift in
the yield curve slope, Young decides to reduce the duration of the bond portfolio and will
employ a futures contract with a 10-year US Treasury notes issue as the underlying.
Young is seeking to set a hedge ratio which will ensure that the volatility of the futures
contract and bond portfolio is matched. Young comes to Ruiz for a solution who designs
a hedging strategy using the Treasury issue. Details concerning the hedging transaction
Exhibit 2:
Hedging Transaction for
Ester Corp’s Defined Benefit Pension Fund
Conversion factor of the 10-year Treasury issue 1.60
Dollar duration of the 10-year Treasury issue $1.1 million
Duration of asset portfolio 12.9
Duration of liabilities 8.6
Value of asset portfolio $2.2 million
Yield beta 0.95
Ruiz warns Young that hedging errors will need to be minimized to insure the hedge is
effective.
25. Using the data in Exhibit 1 and considering each forecast in isolation, Ruiz will
most likely conclude that the holding in 10-year US government bonds is most
desirable in the case of forecast:
A. i.
B. ii.
C. iii.
26. Ruiz’s statement concerning breakeven spread analysis is most likely:
A. correct.
B. incorrect, exchange rate risk is incorporated.
C. incorrect, the approach can be applied to emerging market debt after
adjusting for liquidity risk.
27. Based on the data presented in Exhibit 2, Ester Corp’s pension fund is exposed to
the risk that the slope of the yield curve will:
A. flatten
B. steepen.
28. By attempting to match the volatility of the hedged and hedging instrument,
Young seeks to minimize:
A. basis risk.
B. price risk.
C. interest rate risk.
29. Using the data in Exhibit 2, the hedge ratio is closest to:
A. 26.
B. 39.
C. 41.
30. Which of the following is most likely a potential source of the hedging error
mentioned by Ruiz?
A. Conservative projections of cash market price movements.
B. Overestimating dollar duration of the hedging instrument.
C. Underestimating basis value half way through the hedge term.
Bạn đang xem questions 25 - FINQUIZ LEVEL3 MOCK2017 VERSION6 JUNEPMQUESTIONS
