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NEW QUESTION: 1
Mary Thomas works for Kershaw-Ross, a large investment bank located in London. Kershaw-Ross provides advice to portfolio managers, securities dealers, and hedge funds. Jack Bentley is Thomas assistant.
Washington Capital Management, one of Thomas' clients, has a $5 million position in fixed-rate U.S.
Treasury bonds. The firm would like to hedge this position using calls on Treasury bonds. The calls each cover $100,000 par value of bonds, have a delta of 0.4, and are out-of-the-money. To hedge this position, Thomas recommends that Washington Capital Management calculate the delta for the call options written on these Treasury bonds.
Later that week, Thomas discusses the particulars of option hedges with Francis Steele, Vice President at Washington Capital Management. Thomas describes how using gamma, the change in delta relative to the change in the underlying asset price, can increase the precision of the hedge. She states that this would be particularly true if the bond portfolio used calls that were at-the-money. Bentley adds that given the uncertainty surrounding U.S. Federal Reserve monetary policy, Kershaw-Ross has been advising clients to carefully monitor their bond positions for price changes. Bentley states that in Washington Capital Management's case, if the price of the underlying bond increases by 1% due to a yield curve shift, the calf hedge should be decreased because delta would have increased.
Thomas is analyzing the portfolio for one of his investors, Canopy Managers. Last year the portfolio had a market value of $4,881,000 and a dollar duration of $157,200. The current figures for the portfolio are provided below:
Canopy would like to alter the current dollar duration of the portfolio to last year's duration, and they would like to do so with the least amount of cash possible and a controlling position in one of the bonds.
Canopy Managers has also contracted to take out a 9-month loan for $5 million in three months at LIBOR.
Canopy's chief financial officer has become concerned that interest rates might increase and has asked Thomas to investigate the possibility of hedging the position with a forward rate agreement. Thomas finds a forward rate agreement is available with the same maturity as Canopy's loan at a rate of 4.40%. The risk free rate is 3.8% and LIBOR is projected to be 4.60% at the inception of the loan.
The next week, Thomas and Bentley visit the headquarters of Capital Pension Management, one of Kershaw-Ross's largest clients. Capital is using contingent immunization to immunize a liability, but management is concerned about a possible rise in interest rates. Thomas states that if she were to recommend the most effective strategy to Capital, she would recommend that they use bonds with high yields because immunization will be cheaper. Bentley interjects that the risk from nonparallel shifts in the yield curve can be minimized by concentrating the cash flows around the horizon date.
Due to their tremendous success, Kershaw-Ross has outgrown their current headquarters and is going to expand their current building. Thomas's team has been charged with securing financing tor the renovations. They currently are considering a remodeling and addition that would cost approximately
£5,000,000.
Thomas has secured the financing necessary for the renovations at a floating interest rate of LIBOR plus
150 basis points, with payments made quarterly over three years. Thomas believes that Kershaw-Ross should be able to complete the renovation of the building and close on the loan in one year. She is concerned, however, that interest rates will increase in the interim and has obtained a swaption to hedge the loan. She states that Kershaw-Ross should use a payer swaption to hedge the loan. Bentley evaluates the forecasts for future swap fixed rates as well as the current terms of various swaptions, which are provided below:
Fixed rate for a 1 -year payer swaption = 8.50%
Fixed rate for a 1-year receiver swaption = 8.60%
Projected swap fixed rate in one year = 9.30%
Fixed rate for a 4-year payer swaption - 9.40%
Fixed rate for a 4-year receiver swaption = 9.70%
Projected swap fixed rate in four years = 9.80%
Regarding their statements concerning the strategy of Capital Asset Management, determine whether Thomas and Bentley are correct or incorrect.
A. Both are correct.
B. Only Thomas is correct.
C. Only Bentley is correct.
Answer: C
Explanation:
Explanation/Reference:
Explanation:
Thomas is incorrect. If they use bonds with high yields, it is true that the cost of immunization wil be cheaper. Expected returns are higher so they will have to purchase fewer bonds- However, such bonds will aiso have higher credit risk and contingent immunization assumes no default. If one of the bonds defaults, the immunization strategy will not provide the terminal value required.
Bentley is correct. The risk from nonparallel shifts in the yield curve (immunization risk) can be minimized by concentrating the cash Rows around the horizon date. (Study Session 9, LOS 29.f)
NEW QUESTION: 2
A company has a multi-tiered web application on AWS. During a recent spike in traffic, one of the primary relational databases on Amazon RDS could not serve all the traffic. Some read queries for repeatedly accessed items failed, so users received error messages.
What can be done to minimize the impact on database read queries MOST efficiently during future traffic spikes?
A. Use Amazon RDS as a custom origin for Amazon CloudFront.
B. Use Amazon S3 to cache database query results.
C. Use local storage and memory on Amazon EC2 instances to cache data.
D. Use Amazon ElastiCache in front of the primary database to cache data.
Answer: A
NEW QUESTION: 3
A Salesforce user at Universal Containers has been deactivated.
What will happen to the records the user owns in Salesforce?
A. All records are assigned to the deactivated user until reassigned.
B. All records are automatically deleted.
C. All records are automatically assigned to the Administrator.
D. All records are automatically assigned to another user.
Answer: A
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