) BY ENGAGING IN A CURRENCY SWAP, VIEWMONT CAN ENSURE THAT QUARTERLY...

6.) By engaging in a currency swap, Viewmont can ensure that quarterly earnings repatriated from Brazil are closest to: A. USD2,906,976. B. USD4,844,961. C. USD1,744,186. Chesepeake Virginia Norfolk, CFA, is head of the client strategy committee at Chesapeake Partners, LLC, an investment consulting firm. Chesapeake advises a diverse client base on a variety of investment matters including asset allocation and manager selection. Each month the committee meets to discuss client inquiries and assignments the consultants are working on. Norfolk convenes the committee to discuss pressing issues for several clients. Norfolk asks William Burg, a field consultant, to present on a new client, a small college that Chesapeake advises with regard to the pension fund and the endowment. Burg needs to recommend to the client an appropriate benchmark for each fund. Burg tells the committee, "I recommend that the pension fund benchmark be changed from the pension's liabilities as the benchmark to a bond market index. The pension is closed to new participants and thus the amount and timing of future cash flows are known. The endowment is invested across many asset classes and generate an adequate return to meet its obligations, which consists of a 5% annual contribution to the college's operating fund. The endowment's benchmark for fixed-income managers should continue to be a bond market index, such as Barclays Aggregate Bond Index." Alex Manassas, a committee member asks Burg, "What factors do you consider in selecting a benchmark bond index?" Burg responds, "I look at three key factors when selecting a benchmark. Market value risk should be similar for the portfolio and the benchmark. The longer the duration, the greater the total return potential because rates are low now and the yield curve is so steep. Income risk is important for comparable assured income streams, which can be more stable and dependable in a portfolio with long maturities. The average credit risk in the benchmark should be measured against the investor's overall portfolio and satisfy credit quality constraints in the policy statement." Boris Markov, CFA, is the firm's actuary and expert on asset liability management. His client is a life insurance company that sells guaranteed investment contracts (GICs). The company hired Chesapeake because it has not met the target yield of 4% on the GICs it sold. Markov proposes a new approach to satisfy the obligation: "First, the new single-period immunization strategy should require as a minimum condition that the duration of the bond portfolio equal the investment horizon. In addition, if the bond portfolio has a yield to maturity equal to the target yield and a maturity equal to the investment horizon, then the target value will be achieved". Markov then discusses another client that will require a rebalancing of its portfolio after a shift in interest rates over the last year to maintain the initial dollar duration. He uses the data in the table below to explain to the committee his rebalancing methodology. Exhibit 1 Data for Initial Portfolio and after Interest Rate Shift Initial Portfolio Portfolio after Rate Shift over One Year Price Market Value Duration Price Market Value Duration Bond #1 $104.35 $10,435,000 5.5 $99.75 $9,975,000 4.7 Bond #2 89.55 8,955,000 2.2 95.00 9,500,000 1.3 Bond #3 107.15 10,715,000 5.4 102.40 10,240,000 4.6 Juan Ramirez, CFA, Chesapeake's chief investment officer, brings forward to the committee two investment issues that he would like to discuss. Ramirez tells the committee, "Some of our client's portfolios are for the purpose of funding liabilities, and I am concerned that these liabilities will not be met, given certain risks. In particular, I have noticed that client portfolios have a substantial position in mortgaged-backed securities. We should reallocate these securities to invest in corporate bonds so the portfolio's convexity matches that of the liabilities." Ramirez then presents the committee with the second investment issue. He is focused on a presentation that Alpha Managers, an investment firm that hopes to make it onto Chesapeake's "buy list," made recently. He tells the committee, "I am perplexed by the bottom-up capability that Alpha claims to have in adding value to portfolios. They claim to have a bias to yield maximization across securities without regard to rating differentials."