Câu 31: CFA Level 3

Jack Higgins, CFA, and Tim Tyler, CFA, are analysts for Integrated Analytics (LA), a U.S.-based investment analysis firm. JA provides bond analysis for both individual and institutional portfolio managers throughout the world. The firm specializes in the valuation of international bonds, with consideration of currency risk. IA typically uses forward contracts to hedge currency risk. Higgins and Tyler are considering the purchase of a bond issued by a Norwegian petroleum products firm, Bergen Petroleum. They have concerns, however, regarding the strength of the Norwegian krone currency (NKr) in the near term, and they want to investigate the potential return from hedged strategies. Higgins suggests that they consider forward contracts with the same maturity as the investment holding period, which is estimated at one year. He states that if IA expects the Norwegian NKr to depreciate and that the Swedish krona (Sk) to appreciate, then IA should enter into a hedge where they sell Norwegian NKr and buySwedish Sk via a one-year forward contract. The Swedish Sk could then be converted to dollars at the spot rate in one year. Tyler states that if an investor cannot obtain a forward contract denominated in Norwegian NKr and if the Norwegian NKr and euro are positively correlated, then a forward contract should be entered into where euros will be exchanged for dollars in one year. Tyler then provides Higgins the following data on risk-free rates and spot rates in Norway and the U.S., as well as the expected return on the Bergen Petroleum bond. Return on Bergen Petroleum bond in Norwegian NKr 7.00%Risk-free rate in Norway 4.80%Expected change in the NKr relative to the U.S. dollar -0.40%Risk-free rate in United States 2.50%Higgins and Tyler discuss the relationship between spot rates and forward rates and comment as follows."¢ Higgins: "The relationship between spot rates and forward rates is referred to as interest rate parity, where higher forward rates imply that a country's spot rate will increase in the future.""¢ Tyler: "Interest rate parity depends on covered interest arbitrage which works as follows. Suppose the 1-year U.K. interest rate is 5.5%, the 1-year Japanese interest rate is 2.3%, the Japanese yen is at a one-year forward premium of 4.1%, and transactions costs are minimal. In this case, the international trader should borrow yen. invest in pound denominated bonds, and use a yen-pound forward contract to pay back the yen loan."The following day, Higgins and Tyler discuss various emerging market bond strategies and make the following statements."¢ Higgins: "Over time, the quality in emerging market sovereign bonds has declined, due in part to contagion and the competitive devaluations that often accompany crises in emerging markets. When one country devalues their currency, others often quickly follow and as a result the countries default on their external debt, which is usually denominated in a hard currency.""¢ Tyler: "Investing outside the index can provide excess returns. Because the most common emerging market bond index is concentrated in Latin America, the portfolio manager can earn an alpha by investing in emerging country bonds outside of this region."Turning their attention to specific issues of bonds, Higgins and Tyler examine the characteristics of two bonds: a six-year maturity bond issued by the MidlothianCorporation and a twelve-year maturity bond issued by the Horgen Corporation. The Midlothian bond is a U.S. issue and the Horgen bond was issued by a firm based in Switzerland. The characteristics of each bond are shown in the table below. Higgins and Tyler discuss the relative attractiveness of each bond and, using a total return approach, which bond should be invested in, assuming a 1-year time horizon. Assume that both the Midlothian and Horgen bonds are being considered for purchase. Determine which of the following statements provides the best description of the appropriate strategy using breakeven spread analysis. If the yield for the Horgen bond:

1. A. is expected to increase more than 14 basis points, invest in the Midlothian bond. — đáp án hiện tại
2. B. is expected to increase more than 7 basis points, invest in the Midlothian bond.
3. C. is expected to fall more than 21 basis points, invest in the Midlothian bond.