CFA CFA Level 3 CFAI 2014 – Watanbe Q4

CFAI 2014 – Watanbe Q4

  • Author
    Posts
    • Avatar of vincenttvincentt
      Participant
        • CFA Level 3
        Up
        0
        ::

        Kondo manages a fixed-income portfolio for the Akito Trust. The portfolio’s market value is ¥640 million, and its duration is 6.40. Kondo believes interest rates will rise and asks Watanabe to explain how to use a swap to decrease the portfolio’s duration to 3.50. Watanabe proposes a strategy that uses a pay-fixed position in a three-year interest rate swap with semi-annual payments. Kondo decides he wants to use a four-year swap to manage the portfolio’s duration. After some calculations, Watanabe tells him a pay-fixed position in a four-year interest rate swap with a duration of –2.875 would require a notional principal of ¥683 million (rounded to the nearest million yen) to achieve his goals.

        4.) The duration of the swap in Watanabe’s first proposal to Kondo is closest to:
        Solution:

        A pay-fixed (receive-floating) position in an interest rate swap is similar to issuing a fixed-rate bond and buying a floating-rate bond with the proceeds. The duration of the fixed-rate bond is approximately 75% of the maturity, and the swap is short this duration. The duration of the floating-rate bond is approximately half its repricing frequency, and the swap is long this duration. Therefore, the duration of the three-year
        swap with semi-annual payments is (0.5 × 0.5) – (0.75 × 3) = –2.00.


        @alta12
        @RaviVooda‌

        Where did he get 75% of the 3 year duration from?

      • Avatar of RaviVoodaRaviVooda
        Participant
          • CFA Level 3
          Up
          5
          ::

          @vincentt, this line mentions it “The duration of the fixed-rate bond is approximately 75% of the maturity, and the swap is short this duration”. if it says 75%, we should use 0.75/year.

        • Avatar of vincenttvincentt
          Participant
            • CFA Level 3
            Up
            5
            ::

            @AjFinance‌ it’s still fine if you forget a formula that you wanted to use, the worse feeling is you have no idea where that formula came from or how did they come up with a magic number 0.75 that’s the most worrying!

            But it’s good that we have hardcore candidates like @RaviVooda‌ and @Alta12‌ who uses the underlying text! ^:)^

          • Avatar of vincenttvincentt
            Participant
              • CFA Level 3
              Up
              4
              ::

              @RaviVooda‌ got it. Thanks! I’m not sure if it’s even mentioned in schweser. It’s like giving away free points for not knowing 75%. I need to review quicker, I haven’t even get to the second volume. Are u done with all 3 papers on the second volume?

            • Avatar of RaviVoodaRaviVooda
              Participant
                • CFA Level 3
                Up
                4
                ::

                @AjFinance not sure about schweser, but was mentioned in text book

              • Avatar of RaviVoodaRaviVooda
                Participant
                  • CFA Level 3
                  Up
                  3
                  ::

                  @vincentt sorry. However it is the default value we are expected to remember. I think in the exam they will give it

                • Avatar of RaviVoodaRaviVooda
                  Participant
                    • CFA Level 3
                    Up
                    3
                    ::

                    @vincentt, I missed out this message. Yes I have completed all 3 sets in the schweser second volume

                  • Up
                    3
                    ::

                    @RaviVooda‌ @vincentt‌ Not sure if this is mentioned in schweser indeed! I got that question wrong as well.

                  • Avatar of vincenttvincentt
                    Participant
                      • CFA Level 3
                      Up
                      2
                      ::

                      thx @RaviVooda‌ but the line you highlighted is from the solution and not from the vignette.

                    • Avatar of vincenttvincentt
                      Participant
                        • CFA Level 3
                        Up
                        1
                        ::

                        @RaviVooda‌ So a fixed rate duration is always 75% of the bond maturity? It’s a fixed number?

                      • Avatar of RaviVoodaRaviVooda
                        Participant
                          • CFA Level 3
                          Up
                          0
                          ::

                          @vincentt‌ when nothing is given we take 75%. I remember doing some problem where it was not. In such cases they specify explicitly

                        • Up
                          0
                          ::

                          @vincentt‌ exactly! I can’t imagine going through the cfai text. Hats off to @RaviVooda‌ and @Alta12‌

                      Viewing 11 reply threads
                      • You must be logged in to reply to this topic.