Câu 39: CFA Level 3

Albert Wulf, CFA, is a portfolio manager with Upsala Asset Management, a regional financial services firm that handles investments for small businesses inNorthern Germany. For the most part, Wulf has been handling locally concentrated investments in European securities. Due to a lack of expertise in currency management he works closely with James Bauer, a foreign exchange expert who manages international exposure in some of Upsala's portfolios. Both individuals are committed to managing portfolio assets within the guidelines of client investment policy statements. To achieve global diversification, Wulf's portfolio invests in securities from developed nations including the United States, Japan, and Great Britain. Due to recent currency market turmoil, translation risk has become a huge concern for Upsala's managers. The U.S. dollar has recently plummeted relative to the euro, while theJapanese yen and British pound have appreciated slightly relative to the euro. Wulf and Bauer meet to discuss hedging strategies that will hopefully mitigate some of the concerns regarding future currency fluctuations. Wulf currently has a $1,000,000 investment in a U.S. oil and gas corporation. This position was taken with the expectation that demand for oil in the U.S. would increase sharply over the short-run. Wulf plans to exit this position 125 days from today. In order to hedge the currency exposure to the U.S. dollar, Bauer enters into a 90-day U.S. dollar futures contract, expiring in September. Bauer comments to Wulf that this futures contract guarantees that the portfolio will not take any unjustified risk in the volatile dollar. Wulf recently started investing in securities from Japan. He has been particularly interested in the growth of technology firms in that country. Wulf decides to make an investment of ¥25,000,000 in a small technology enterprise that is in need of start-up capital. The spot exchange rate for the Japanese yen at the time of the investment is ¥135/€. The expected spot rate in 90 days is ¥132/€. Given the expected appreciation of the yen, Bauer purchases put options that provide insurance against any deprecation of the euro. While delta-hedging this position, Bauer discovers that current at-the-money yen put options sell for €1 with a delta of -0.85. He mentions to Wulf that, in general, put options will provide a cheaper alternative to hedging than with futures since put options are only exercised if the local currency depreciates. The exposure of Wulf's portfolio to the British pound results from a 180-day pound-denominated investment of £5,000,000. The spot exchange rate for the British pound is £0.78/€. The value of the investment is expected to increase to £5,100,000 at the end of the 180 day period. Bauer informs Wulf that due to the minimal expected exchange rate movement, it would be in the best interest of their clients, from a cost-benefit standpoint, to hedge only the principal of this investment. Before entering into currency futures and options contracts, Wulf and Bauer discuss the possibility of also hedging market risk due to changes in the value of the assets. Bauer suggests that in order to hedge against a possible loss in the value of an asset Wulf should short a given foreign market index. Wulf is interested in executing index hedging strategies that are perfectly correlated with foreign investments. Bauer, however, cautions Wulf regarding the increase in trading costs that would result from these additional hedging activities. Is Bauer correct in stating to Wulf that put options provide a cheaper means of hedging than futures?

1. A. No, since Bauer is only concerned with unfavorable currency movements, natures would be cheaper. — đáp án hiện tại
2. B. No, despite being less liquid, futures are less expensive to use.
3. C. Yes, given that Bauer can choose to exercise the options or let them expire, options are cheaper since the payoff is only to one side.