30 RELATE TO ASSET ALLOCATION, GLOBAL BONDS, RISK MANAGEM...

Questions 25-30 relate to Asset Allocation, Global Bonds, Risk Management, and Risk

Management Applications of Derivatives.

Mary Rolle and Betty Sims are portfolio managers for RS Global Investments, located in

Toronto, Canada. RS specializes in seeking undervalued stocks and bonds throughout the

North American, Asian, and European markets. RS has clients throughout North America,

however, the majority are Canadian (CAD) institutional investors. RS has traditionally

managed currency risk in their portfolios by assigning it to their portfolio managers. The

manager is allowed discretion for hedging currency risk within the confines of the investor's

investment policy statement with the primary goal of reducing portfolio risk.

Rolle and Sims are currently deciding whether to hedge the currency risk of a portfolio of

Japanese (JPY) stocks. Rolle explores the possibility of using three different currency hedges.

Each is an option contract on the yen-Canadian dollar exchange rate.

Hedge A Buy CAD Calls

Hedge B Sell CAD Puts

Hedge C Sell JPY Puts

RS has a portfolio of European stocks and would like to change its equity risk. They can enter

into futures contracts on the Eurostoxx index of large European stocks. The information

below provides the characteristics of the futures contract and the portfolio.

Portfolio value in euros 2,000,000

Desired beta value 1.80

Current portfolio beta 0.60

Beta of futures contract 1.02

Value of one futures contract in euros 110,000

Risk-free rate 2.5%

RS is also invested in British and Argentine stocks. RS has taken a position in two main

sectors of the British economy. The first sector consists of manufacturers who derive a great

deal of their business from exporting to the United States and Canada. The other sector

consists of British service firms who are largely immune from international competition,

because most of their business is localized and cannot be provided by foreign firms. The main

investment in the Argentine stocks consists of firms who provide cellular phone service to

Argentine consumers. Rolle and Sims discuss which currency positions RS should hedge.

Upon further analysis, RS has determined it will hedge the currency risk of the Argentine

stocks. Their goal is downside protection and modest upside potential for the ARS currency.

RS has also received notification from one of its larger clients that a large contribution will be

received into the portfolio in six months; the funds are to be synthetically preinvested in a

60/40 allocation to U.K. stocks and bonds.

...

Which of following best describes the approach used by RS to manage currency risk?

A) Currency overlay.

B) Discretionary hedging.

C) Active currency management.

Question #26 of 60

Regarding hedging the currency risk of the Japanese stock portfolio, which hedge would

be most appropriate?

A) Hedge A.

B) Hedge B.

C) Hedge C.

Question #27 of 60

For RS to change the equity risk of their European stocks, the most appropriate strategy is to:

A) buy 4 equity futures contracts.

B) buy 18 equity futures contracts.

C) buy 21 equity futures contracts.

Question #28 of 60

Regarding the currency hedge of the British and Argentine stocks, which of the following

would RS least likely hedge?

A) The British service firms.

B) The British manufacturers.

C) The Argentine cellular phone service firms.

Question #29 of 60

To meet its currency risk management goals for the ARS, RS is most likely to:

A) sell the ARS forward to buy CAD.

B) buy 40-delta and sell 30-delta puts on the ARS.

C) buy out-of-the-money calls on the CAD and sell out-of-the-money calls on ARS.

Question #30 of 60

Which of the following strategies is most compatible with RS's requirement to preinvest

funds in a 60/40 allocation to U.K. stocks and bonds?

A) Buy U.K. FTSE stock index futures and sell U.K. bonds futures.

B) Buy calls and sell puts on U.K. stock index futures, plus buy calls on U.K. bonds.

C) Buy calls and sell puts on U.K. stock index futures, plus sell calls and buy puts on U.K. bonds.

Question #31 of 60