Câu 32: CFA Level 3

Walter Skinner, CFA, manages a bond portfolio for Director Securities. The bond portfolio is part of a pension plan trust set up to benefit retirees of Thomas SteelInc. As part of the investment policy governing the plan and the bond portfolio, no foreign securities are to be held in the portfolio at any time and no bonds with a credit rating below investment grade are allowable for the bond portfolio. In addition, the bond portfolio must remain unleveraged. The bond portfolio is currently valued at $800 million and has a duration of 6.50. Skinner believes that interest rates are going to increase, so he wants to lower his portfolio's duration to 4.50. He has decided to achieve the reduction in duration by using swap contracts. He has two possible swaps to choose from:1. Swap A: 4-year swap with quarterly payments.2. Swap B: 5-year swap with semiannual payments. Skinner plans to be the fixed-rate payer in the swap, receiving a floating-rate payment in exchange. For analysis, Skinner always assumes the duration of a fixed rate bond is 75% of its term to maturity. Several years ago, Skinner decided to circumvent the policy restrictions on foreign securities by purchasing a dual currency bond issued by an American holding company with significant operations in Japan. The bond makes semiannual fixed interest payments in Japanese yen but will make the final principal payment inU.S. dollars five years from now. Skinner originally purchased the bond to take advantage of the strengthening relative position of the yen. The result was an above average return for the bond portfolio for several years. Now, however, he is concerned that the yen is going to begin a weakening trend, as he expects inflation in the Japanese economy to accelerate over the next few years. Knowing Skinner's situation, one of his colleagues, Bill Michaels, suggests the following strategy:"You need to offset your exposure to the Japanese yen by establishing a short position in a synthetic dual currency bond that matches the terms of the dual currency bond you purchased for the Thomas Steel bond portfolio. As part of the strategy, you will have to enter into a currency swap as the fixed-rate yen payer. The swap will neutralize the dual-currency bond position but will unfortunately increase the credit risk exposure of the portfolio."Skinner has also spoken to Orval Mann, the senior economist with Director Securities, about his expectations for the bond portfolio. Mann has also provided some advice to Skinner in the following comment:"1 know you expect a general increase in interest rates, but I disagree with your assessment of the interest rate shift. I believe interest rates are going to decrease.Therefore, you will want to synthetically remove the call features of any callable bonds in your portfolio by purchasing a payer interest rate swaption."Critically evaluate Mann's suggested strategy in the event that interest rates move counter to Skinner's expectations.

1. A. Mann's statement is correct.
2. B. Mann is incorrect; callable bonds should be offset by selling a payer swaption.
3. C. Mann is incorrect; callable bonds should be offset by purchasing a receiver swaption. — đáp án hiện tại