36. Which of the criteria outlined by Alpha is least accurate with respect to the selection of a fixed
income manager?
A. Criterion 1
B. Criterion 2
C. Criterion 3
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Kamiko Watanabe Case Scenario
Kamiko Watanabe, CFA, is a portfolio advisor at Wakasa Bay Securities. She specializes in the use of
derivatives to alter and manage the exposures of Japanese equity and fixed income portfolios. She has
meetings today with two clients, Isao Sato and Reiko Kondo.
Sato is the manager of the Tsushima Manufacturing pension fund, which has a target asset allocation of
60% equity and 40% bonds. The fund has separate equity and fixed income portfolios, whose
characteristics are provided in Exhibits 1 and 2. Sato expects equity values to increase in the coming two
years and, in order to avoid substantial transaction costs now and in two years, would like to use
derivatives to temporarily rebalance the portfolio. He wants to maintain the current beta of the equity
portfolio and the current duration of the bond portfolio.
Exhibit 1: Tsushima Pension Fund
Equity Portfolio Characteristics
Current market value JPY27.5 billion
Benchmark Nikkei 225 Index
Current beta 1.15
Exhibit 2: Tsushima Pension Fund
Bond Portfolio Characteristics
Benchmark Nikko Bond Performance Index
composite
Current duration 4.75
In order to rebalance the pension fund to its target allocations to equity and bonds, Watanabe
recommends using Nikkei 225 Index futures contracts, which have a beta of 1.05 and a current contract
price of JPY1,525,000, and Nikko Bond Performance Index futures, which have a duration of 6.90 and a
current contract price of JPY4,830,000. She assumes the cash position has duration of 0.25.
Sato wants to know if other derivatives could be used to rebalance the portfolio. In response, Watanabe
describes the characteristics of a pair of swaps that, together, would accomplish the same rebalancing
as the proposed futures contracts strategy.
Kondo manages a fixed income portfolio for the Akito Trust. The portfolio’s market value is JPY640
million, and its duration is 6.40. Kondo believes interest rates will rise and asks Watanabe to explain how
to use a swap to decrease the portfolio’s duration to 3.50. Watanabe proposes a strategy that uses a
pay-fixed position in a 3-year interest rate swap with semi-annual payments.
Kondo decides he wants to use a 4-year swap to manage the portfolio’s duration. After some
calculations, Watanabe tells him a pay-fixed position in a 4-year interest rate swap with a duration of –
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