券和组合课后习题答案：sm24

1、CHAPTER 24SWAP CONTRACTS, CONVERTIBLE SECURITIES,AND OTHER EMBEDDED DERIVATIVESAnswers to Questions1.CFA Examination III (1994)l(a). An interest rate swap is a customized risk-management vehicle. In a pension portfolio (i.e., investment) context, an interest rate swap would be represented by an agre

2、ement between two parties to exchange a series of interest money cash flows for a certain period of time (term) based on a stated (notional) amount of principal. For example, one party will agree to make a series of floating-rate coupon payments to another party in exchange for receipt of a series o

3、f fixed-rate coupon payments (or vice versa, in which case the swap would work in reverse). No exchange of principal payments is made.l(b). Strategies using interest rate swaps to affect duration or improve return in a domestic fixed-income portfolio can be divided into two categories:Duration modif

4、ication. Swapping floating- for fixed-rate interest payments increases portfolio duration (and vice versa, decreases duration when the portfolio is the floating-rate recipient). This method of modifying duration can be used either to control risk (e.g., keep it within policy guidelines/ranges) or to

5、 enhance return (e.g., to profit from a rate anticipation bet while remaining within an allowed range).Seeking profit opportunities in the swap market. Opportunities occur in the swap market, as in the cash markets, to profit from temporary disequilibrium between demand and supply. If, in the proces

6、s of exploiting such opportunities, portfolio duration would be moved beyond a policy guideline/range, it can be controlled by using bond futures contracts or by making appropriate cash-market transactions.If a strategy calls for a large-scale reorientation of the portfolios characteristics in a man

7、ner that swaps could achieve, their use for implementation of the strategy would act to reduce transaction costs (thus improving portfolio return) and might also permit transactions to be effected more quickly or completely than through conventional trading mechanisms.2.An interest rate swap is an a

8、greement to exchange a series of cash flows based on the difference between a fixed interest rate and a floating interest rate on some notional amount. A fixed rate receiver would get the difference between a fixed rate and a floating rate if the fixed rate was above the floating rate, and pay the d

9、ifference if floating was above fixed. The fixed rate is set so that no cash changes hands upon initiation of the deal. This can be thought of as:i. A series of forward contracts on the floating rate because forward contracts also have no initial cash flow and will net the difference between the flo

10、ating rate and the forward rate (which acts like a fixed rate). To make the analogy precise, only one forward rate is chosen but it is chosen such that the sum of the values of all the contracts are zero. The fixed rate receiver is like the short position in the interest rate forwards, because if in

11、terest rates go up, she loses.ii. A pair of bonds, one with a floating-rate coupon the other with a fixed-rate coupon (both selling at par with the same face value and maturity). Being the fixed-rate receiver in the swap is the same as being long the fixed-rate bond and short the floating-rate bond.

12、 As long as the floating rate is less than the fixed rate, the coupon payment from the fixed-rate bond will cover the interest due on the floating rate bond and the difference is profit. If the floating rate is above the fixed rate then the fixed-rate receiver must make up the difference. Since the

13、bonds are of the same face amount, there is no net cash flow at the beginning or end of the agreement.3.To have zero value at origination, the present vale of the expected cash flows from the swap must be zero. This implies that if there is an upward sloping yield curve, the expected cash flows to t

14、he floating payer will come at the beginning of the swap and be offset by expected payments by the floating payer at the end of the swap. The only way this is possible is if the fixed rate is somewhere between the current floating rate (low) and the implied floating rate later in the contract (high)

15、.4.You are essentially holding a two-year swap agreement that requires you to pay 7% in exchange for floating. Since the market rate for the same swap is 6.5%, if your counterparty defaulted you would be able to replace the swap at a lower rate. Thus, it would be to your benefit for your counterpart

16、y to default, and you would realize an economic gain.5.You have created an off-market swap where you are paying a fixed rate of 7%. This is seen by analyzing the portfolio of long a 7% cap and short a 7% floor. If interest rates are above 7%, then the cap pays the difference between 7% and the float

17、ing rate, and the floor is out-of-the money. If interest rates are below 7%, then you must pay the difference between floating and 7%, and the cap is out-of-the-money. Since the market rate is a fixed rate of 8% for the same maturity and you only have to pay 7%, you will have to pay money up-front t

18、o get the cap and floor. In other words, the cap costs more than you will get from selling the floor.6. CFA Examination III (1995)6(a). The problem here is to sell equities and reinvest the proceeds with the skilled fixed-income manager, without changing the split between the existing allocations to

19、 the two asset classes. The solution is to turn to derivative financial instruments as the means to the end: selling enough of the existing fixed-income exposure and bringing in enough of the equity exposure to get the desired mix result.The following are distinct derivatives strategies that the boa

20、rd could use to increase the Funds allocation to the fixed-income manager without changing the present fixed-income/equity proportions:Strategy 1 - Use futures: One strategy would be to sell futures on a fixed-income index and buy futures on an equity index.Selling the futures eliminates the fixed-i

21、ncome index return and risk, while keeping the skilled fixed-income managers extra return. By being long the equity index, the portfolio obtains the index return and risk, keeping its exposure to the equity market.Strategy 2 - Use swaps: A second strategy would be to use over-the-counter (OTC) swaps

22、.BI would swap a fixed-income index return for an equity index return in a notional amount large enough to keep the skilled managers extra return while eliminating the fixed-income market return and replacing it with the equity market return.Strategy 3 - Use option combinations: A third strategy wou

23、ld use put and call options to create futures-like securities.Buying put options and selling call options on a fixed-income index, while selling put options and buying call options on a stock index, would achieve the same result as the appropriate futures position.6(b). The following are advantages

24、and disadvantages of each strategy identified and explained in Part A:Strategy 1 - Use futuresAdvantages:1. Futures contracts are liquid instruments. 2. Transaction costs are low.3. Credit risk is negligible because the securities are marked to market daily.Disadvantages:1. If the holding period is

25、long, rollover (transaction) costs are incurred.2. Standard contract forms are limited, so contracts may not exist on the index or instrument needed. Tracking errors may create basis risk between the index and the performance benchmark.Strategic 2 - Use swapsAdvantages:1. Swaps can be tailored to fi

26、t the desired investment horizon, eliminating (or reducing) rollover costs.2. Swaps can be contracted for a specific index (like the performance benchmark) even if there is no futures contract on it.3. The desired adjustment goal can be accomplished through a single transaction.Disadvantages:1. A co

27、unterparty credit risk is created that can be much larger than with other types of instruments.2. Swap agreements are illiquid instruments, and disposals can be both difficult and expensive.3. Transaction costs are large because of typical “tailoring” of a given swap.Strategy 3 - Use option combinat

28、ionsBuying put and call options on fixed income index (synthetic short position) and buying call and selling puts on stock index (synthetic long position)Advantages:1. Transaction costs are low.2. Credit risks are small.Disadvantages:1. Rollover(s) may be necessary.2. The “right” option may not be a

29、vailable when needed or at all.3. Holders may exercise the put option and end the hedge.A generic disadvantage of any strategy is that returns are automatically eroded by the costs of establishing and maintaining the strategies, of meeting margin requirements, if any, and of unwinding them, if neces

30、sary.7.CFA Examination III (1995)7(i). From BIs perspective, the major risk it would eliminate under this transaction is represented by participation in the EAFE Index (to the extent that this participation has been reduced), the return on which is now being paid to the counterparty bank.BI has redu

31、ced its international equity exposure. The market risk, formerly present in that part of the total participation that has now been swapped out in exchange for S&P Index exposure, has been eliminated.7(ii). From BIs perspective, the major risk that is retained after this transaction (i.e., not elimin

32、ated) is the risk of tracking error between BIs international equity portfolio and the EAFE Index. This potential tracking error arises from differences between the portfolio and the index in terms of country weights and security selection. Thus, as the correlation coefficient between BIs portfolio

33、and the index is probably less than 1.0, a basis risk is retained.To the extent that significant differences in composition now exist (either in terms of country weights or security selection), BIs return experience could be quite different from that expected when the decision to change the exposure

34、 was made. In effect, the transaction is a bet that U.S. stocks will outperform EAFE stocks in U.S. return terms. The market risks inherent in all such exposures still apply, including exposure to global equity markets. Because the EAFE return is dollar denominated, the BI international equity portf

35、olio is still exposed to currency risk either hedged or unhedged.7(iii). From BIs perspective, risks created under this transaction include:1. Counterparty credit risks. BI now has contractual relationships with two banks that it did not have before, creating a new risk dimension that will require m

36、onitoring and ongoing evaluation. This credit risk is, in effect, an added element of cost and uncertainty that must be considered in assessing the cost/benefit outcomes expected to result from the transaction.2. Return risks arising from spread changes between LIBOR and T-bill rates. If the initial

37、 or expected spread between these two markets moves against BI, it will find its realized return to be different from its expected return. This will, in effect, increase the cost of the move and reduce its efficacy.3. Return risks arising from differential S&P 500 Index and EAFE Index performance. F

38、uture relative performance levels are uncertain. Thus, BIs new risks include not only a spread risk in terms of the S&P Index (added) versus the EAFE Index (reduced) but also spread risk between the actual portfolio and the index portfolios.4. Risk related to the one-year term of the transaction. If

39、 BI wants to reverse or modify the original move away from international to U.S. equity exposure or to change the LIBOR/T-bill markers, new complications arise. Liquidity risk is now present. Changing or undoing the contracts with the counterparty banks may be impossible or unduly costly. A risk of

40、being “frozen-in-place” and being unable to take advantage of new circumstances or avoid new dangers has been introduced. A corollary risk is that the one-year term does not equate with the “temporary” reduction intent of the bonds proviso. A risk of overstaying a temporary reduction has been introd

41、uced and may manifest itself in liquidity or additional expense terms.5. Rollover risk. BI may be unable to renew the contracts on satisfactory terms if the board wants to do so at the expiration of the original one-year term.6. Lower diversification. BI has temporarily reduced its diversification b

42、ecause it has decreased its international equity exposure and increased its domestic equity exposure.7. Risk of mismatched notional amounts. If the swaps have variable notional amounts, there is risk that the notional amounts upon which the swap payments are based may become mismatched as the return

43、 experience of the EAFE and S&P 500 indexes diverge.8. Regulatory, legal, or accounting risk. BI has added the risk that the regulatory, legal, or accounting treatment of these swaps may be changed unfavorably during the term of the contracts.9. Benchmark measurement. The benchmark should measure th

44、e portfolio managers execution of the strategies for which he or she is responsible. If the board changes the strategy, it may need to change the benchmark.8.CFA Examination III (1997)8(a).Transactions Needed to Restore Balancei.Futures. The most straightforward way to restore the portfolios 50 perc

45、ent bonds/50 percent equity allocation and restore (lengthen) the duration is for the plan to purchase a $200 million equity index (i.e., S&P 500 Index) futures position and a $200 million fixed (i.e., long-duration Treasury) bond futures position.ii.Swaps. Entering into two swaps will restore the 5

46、0 percent bond/50 percent equity allocation. On the fixed-income side, the floaters impact on portfolio duration (shortening) will be offset if the plan enters into a $200 million receiver interest rate swap in which it pays T-bill (plus 50 basis points bps) and receives fixed (long-bond) exposure.

47、On the equity side, rebalancing also requires a $200 million swap in which the plan pays T-bill (plus 50 bps) returns and receives equity index return. This transaction could be accomplished with one swap - that is, swapping $400 million of floating-rate returns for a 50/50 blend of fixed-income and

48、 equity returns.8(b).Advantages and Disadvantages of Using FuturesAdvantages:Futures contracts do not expose the plan to credit (counterparty) risk, as swaps do.Although volume and liquidity in futures contract trading vary among markets and indexes, futures pricing for many major market indexes is

49、generally tight enough that exchange-traded futures offer flexibility, observable prices, and ease of entry and exit. Buying or selling the contract is simpler and more certain in the open market than is identifying a willing counterparty to negotiate a reverse swap.Implementing a futures position i

50、s easier than implementing a swap because of the smaller denominations possible for futures.Because of regulations, swaps cannot be used for certain cases for which futures may be used.Futures may be mispriced (below fair value).Disadvantages:A futures contract involves the buyer in rollover risk du

51、ring the two-year period. The swap approach transfers the rolling risk to the counterparty.Futures must be marked to market and involve maintenance margins.The buyer incurs the risk of tracking error - related to the futures contract vs. the underlying security (basis risk) or the futures contract v

52、s. the hedged asset. Standard futures contracts do not lend themselves to customization in terms of underlying assets or maturities.Futures may be mispriced (above fair value).Futures require two transactions to achieve the same result as one swap.9.The difference between warrants and regular option

53、s comes from the difference in issuer. Unlike a regular call option, when a warrant is exercised the shares purchased are new shares created by the company. Since the shares have identical rights as existing shares and have been purchased at a discount to existing shares (otherwise the warrants woul

54、dnt be exercised) the value of existing shares is watered down. This depresses the value of the stock. Consequently warrants are less valuable than regular options since regular options have no affect on the capital structure of the firm.Firms may wish to issue warrants if the floatation costs are l

55、ower or if they are worried about not being able to sell enough new stock. Warrants can be used to “force” the issuance of new shares.10. Convertible bonds and preferred stock are both very similar to an ordinary bond (or perpetuity) and a call option on the firms common stock. This is because these

56、 instruments give the holder the option but not the obligation to trade in the existing asset for common stock, much the way a call option gives its holder the right but not the obligation to purchase shares at a prospected price. Since call options have upside potential and a limited downside, thes

57、e traits are passed on to the convertible bonds and preferred stock. The pricing of these securities must take into account the optionality embedded in the issue.11.CFA Examination II (2000)11(a).i.Equity index-linked noteUnlike traditional debt securities that pay a scheduled rate of coupon interes

58、t on a periodic basis and the par amount of principal at maturity, the equity uindex-linked note typically pays no or little coupon interest; at maturity, however, a unit holder receives the orginal issue price plus a supplemental redemption amount, the value of which depends on where the equity ind

59、ex settled relative to a predetermined initial level. 11(a).ii. Commodity-linked bear bond Unlike traditional debt securities that pay a scheduled rate of coupon interest on a periodic basis and thee pr amount of principal at maturity, the commodity-linked bear bond allows for an investor to partici

60、pate in a delcine in a commoditys price. In exchange for a lower than market coupon, buyers of a bear tranche will receive a redemption value that exceeds the puchase price if the commodity price has declined by the maturity date. 11(b).i. A dual currency bond is a debt instrument that has coupons d