章节14资产配置任务-1讲义09.v4cfa三级

【梦轩考 专业提供CFAFRM全 99͵'YYKZTTopicTopicinCFALevelSS1-ETHICS&PROFESSIONALPRIVATEWEALTHMANAGEMENTPRIVATEWEALTHMANAGEMENTPERFORMANCEEVALUATIONANDGLOBALINVESTMENTPERFORMANCEFrameworkofR18CurrencyManagement:AnR19Marketindexesand SpotQuote/ForwardSpot3090SpotQuote/ForwardSpot3090PriceandBaseBasecurrency:denominatoroftheexchangerateanditispricedintermsofthenumerator.Unlessclearlyidentifiedotherwise,theterms“buy”and“sell”refertothesebasecurrency.E.g.sellspot1,000,000atCAD/USD0.9800isassumedtomeansellfor“immediatedelivery”1,000,000U.S.dollarsandbuy980,000CanadianE.g.buy5000,000USD/CHFsixmonthsforward1.07isassumedtomeanbuy500,000Swissfrancs,settlinginsixmonthsversussellUSD535,000.Bid/AskedBid/Askedrules:boththebidandtheaskedcanbeinterpretedthesaleofonecurrencyversusthepurchaseoftheotherThedifferenceisthedealer’sprofitmargintobuyorselltheThecustomerpaysthebid/askspread,payingmoreand/orreceivinglessinthetransaction.Aquoteof0.9790/0.9810CAD/USDhasfourBuy1.0000USDandSell0.9810CADandSell1.0000USDandreceiveBuy0.9790CADanddeliverExample˖Spotandforwardbid/askedSpotandforwardbid/askedquotesoftheAustralianWhatisthe30dayforwardbid/offeredIfamanagersells1,000,000AUDforward90days,calculatewhatthemanagerwilldeliverandreceive.WhenwilltheexchangetakeMaturity/SpotQuote/ForwardLIBORMaturity/SpotQuote/ForwardLIBORRates306090Example˖Spotandforwardbid/askedAnswer:Theforwardpointsareanadjustmenttotherightmostdigitsofthespotquote.Forthebid1.2571-1.0isactually1.2571-0.000101.25700.Fortheasked1.2574-0.9isactually1.2574-0.000091.25731.The30-dayforwardquoteis1.25700/1.25731Theexchangewillbe90daysfromthetradedate,atcontractexpiration.ThemanagerwilldeliverAUD1,000,000The90-dayforwardquotesare1.2571+0.00117by1.2574+0.00120,whichis1.25827/1.2860fortheAUD/EUR.ThemanagerisdeliveringAUDandreceivingEUR.ThemanagermustdelivermoreAUDorreceivefewerEUR.Inthiscase,thebid/askedquotesarebothfor1EURandthemanagerwilldeliverAUD.ThemanagermustdeliveratAUD/EUR1.25860ThemanagerwillreceiveEUR:AUD EUROffsettingtransactionsandmarktoForwardDonotrequiremarktomarketcashflowexchangespriorDesirableorrequiredforregulatorypurposestomarkthepositiontomarketvalueMark-to-marketvalue:presentvalueofanygainorlossthatwouldberealizedifthecontractwereclosedearlywithanoffsettingcontractpositionExample˖OffsettingBasedontheinitialquotesgiveninthepreviousexample,adifferentmanagerenteredintoatradetosell(deliver)90daysforward,EUR10,000,000atthe“all-in”forwardquoteofAUD/EUR1.25827.Thirtydayshavepassedandexchangeratesarenowthefollowing:Identifytheoffsettingpositionthemanagerwouldtaketoclosetheinitialtransactionandcalculatetheresultinggainorloss.Whenwillthisgainorlossbesettled?Calculatethemarktomarketthemanagerwouldreportonday30oftheoriginaltradeifthetradewerenotclosedoutearly.306090306090180Example˖OffsettingThirtydayshavepassedandtheinitialtradetosellEUR10,000,000forwardhas60daysuntilexpiration.Theoffsettingtransactionistobuy10,000,000EUR60daysforward.Step1:Identifytheforwardexchangeratefortheoffsettingposition.ThemanagermustbuyEUR10,000,000(whichrequiresdeliveringAUD)60daysforwardatAUD/EUR1.3191+0.00105,whichisAUD/EUR1.32015.Step2:In60days,themanagerwilldotheOntheoriginaltrade:sellEUR10,000,000andbuyAUDat1.25827.ThemanagerwillreceiveAUDOntheoffsettingtrade:buyEUR10,000,000andsellAUDatAUD/EUR1.32015.ThemanagerwillpayAUD13,201,500.Thedifference,alossofAUD618,800,willbesettledandpaid90daysaftertheinitialtransactionand60daysaftertheoffsettingtransaction.Example˖OffsettingThecurrentmarktomarketisthepresentvalueofthegainorlossthatwouldbelockedinwithanoffsettingtransaction.ThatoffsettinglosswascalculatedinSolution1asAUD618,800.The60-dayLIBORrateontheAUDis1.20%Mark-to-marketloss=AUD618,800/(1+(0.012(60/360)))Example:ValuingaforwardcontractpriortoYewMunYiphasenteredintoa90-dayforwardcontractlongCAD1millionagainstAUDataforwardrateof1.05358AUD/CAD.Thirtydaysafterinitiation,thefollowingAUD/CADquotesareavailable˖Thefollowinginformationisavailable(att=30)forAUDinterest30-dayrate˖60-dayrate˖90-dayrate˖Whatisthemark-to-marketvalueinAUDofYip'sforward【梦轩考 专业提供CFAFRM全 TheforwardbidpriceforanewcontractexpiringinT-t=60days1.0612+8.6/10,000=Theinterestratetousefordiscountingthevalueisalsothe60-dayAUDinterestrateofl.16%˖ FPT 1R Mark-to-marketMark-to-marketvalueofaforwardThevalueoftheforwardcontractwillchangesasquotesforthecurrencypairchangeintheThevalueofaforwardcontract(tothepartybuyingthebasecurrency)atmaturity(timeT)is˖ Thevalueofaforwardcurrencycontractpriortoexpirationisalsoknownasthemark-to-marketvalue. FPt FPcontract 1 FXTheFXswapisnotacurrencyswaporevenaswapasthattermisotherwiseused.TheFXswaprollsoveramaturingforwardcontractusingaspottransactionintoanewOnwardcontract.Anexistingforwardis'swapped"foranotherforwardExample:Amanagerpurchased10,000,000SouthAfricanrand(ZAR)threemonthsforwardatZAR/USD0.1058.Twodaysbeforecontractexpirationthemanagerdecidestoextendthetransaction(W)another30days.ExplaintheFXswapusedtoimplementthisdecision.Answer:ThemanagersellsspotZAR10,000,000tooffsetthematuringcontract.Boththeinitialforwardandoffsettingspottransactionwillsettleintwobusinessdays.Themanagerentersanew30-dayforwardcontracttobuyZAR10,000,000versustheUSDtorolloverthetrade.【梦轩考 专业提供CFAFRM全 OptionCalloption˖arighttobuytheunderlyingandgainsvalueastheunderlyingrisesabovethestrikepriceItsdeltaapproaches1.00(a100-Thecalllosesvalueastheunderlyingfallsbelowthepriceanditsdeltaapproaches0.00(a0-Putoption˖righttoselltheunderlyingandgainsvalueastheunderlyingfallsbelowthestrikepriceItsdeltaapproaches-100(thiscsobereferredtoasa100-delta,thenegativesignisassumedandnotwritten).Theputlosesvalueastheunderlyingrisesabovethestrikepriceandthedeltaapproaches0.00(a0-delta).Foracallandaputwithidenticalparameters(timetoexpiration,strikeprice,andpriceoftheunderlying),thesumoftheabsolutedeltasis1.00or100-delta.CurrencyOptionCurrencyoptionsrequiretwocurrenciesandacallononeisaputontheotherUnlessotherwisespecified,theoptionisfromthebasecurrency.E.g.acalloptiontobuy10,000,000atastrikepriceofZAR/GBP14.56Itistherighttobuy10,000,000Britishpoundsand145,600,000SouthAfricanItisalsoaputoption therighttosell145,600,000SouthAfricanrandandbuy10,000,000Britishpounds.ImportantrelationshipsbetweencallandAsthePriceoftheBateCurrencyFrom0totheTotheFromthestrikepriceupward

TheCallOptionBuytheBaseIsout-of-the-moneyandrisinginvalue. DeltaisshiftingFrom0.0toward0.5(froma0-deltatoaIsat-the-money.Deltaisapproximay0.5(a50-Isin-the-moneyandrisinginvalue.Deltaisshiftingfrom0.5toward1.0(froma50-deltatoa100-delta).

ThePutOptiontosellBaseIsin-the-moneyandfallinginvalue.Deltaisshiftingfrom1.0toward-0.5(froma100-deltatoa50-delta)Isat-the-money.Deltaapproximay-0.5(a50-Isout-of-the-moneyandfailinginvalue.Deltaisshiftingfrom-0.5toward0.0(fromadeltatoa0-【梦轩考 专业提供CFAFRM全 EffectsofCurrencyonPortfolioRiskandDomesticcurrencyorhomecurrency:thecurrencyoftheinvestorthecurrencyinwhichportfolioresultsarereportedandDomesticasset:assetdenominatedintheinvestor’sdomesticForeigncurrencyandforeignasset:acurrencyotherthantheinvestor'sdomesticcurrencyandanassetdenominatedinthatforeigncurrency(localcurrency,orlocalmarket).Foreign-currencyreturn(RFC):returnoftheforeignassetmeasureditslocal(foreigncurrency),alsocalledthelocalmarketreturn䍴ӗLocalcurrencyreturn(RFX):thepercentagechangeinthevalueoftheforeigncurrency.ཆ≷䜘Domestic-currencyreturn(RDC):returnindomesticcurrencyunitsconsideringboththeforeign-currencyreturn(RFC)andthepercentagechangeinvalueoftheforeigncurrency(RFX)EffectsofCurrencyonPortfolioRiskandTwosourcesofriskandreturnofaforeignassetpricedinforeignThereturnontheassetsintheforeignThereturnontheforeigncurrencyfromanychangeinitsexchangeratewiththeinvestor’sdomesticcurrency (1RFC)(1RFX) (RFC)(RFXExample:CalculatingdomesticcurrencyConsideraUSD-basedinvestorwhoinvestsinaportfolioofstocksthattradeineuros.Overaone-yearholdingperiod,thevalueoftheportfolioincreasesby5%(ineuros)andtheeuro-dollarexchangerateincreasesfrom1.300USD/EURto1.339USD/EUR.TheEURhasappreciatedwithrespecttotheUSD,sotheinvestorhaspositivereturnsfromforeignexchangeof:RFX=1.339/1.300—1=0.03=Theinvestor'sreturnindomesticcurrencytermsovertheone-yearholdingperiodis:RDC=(1.05x1.03)—1=0.05+0.03+(0.05)(0.03)=0.0815=SimplyaddingRFCandRFX(5%+3%=8%)yieldsanapproximationofthedomesticcurrencyreturn.Theexchangeratequotesmustusetheforeigncurrency(EUR)asthebasecurrency(thedenominator)tocalculatethechangeinthevalueofthecurrency【梦轩考 专业提供CFAFRM全 PortfolioreturnformultipleinvestmentsinAninvestormayinvestinmultiplemarketswithdifferentcurrencies.Inthatcase,thedomesticportfolioreturnisaweightedaverageofthedomesticcurrencyreturnsforeachinvestment.nRD wi(RDC,ii theproportion(indomesticcurrencyterms)oftheportfolioinvestedinassetstradedincurrencyIRDC, thedomesticcurrencyreturnforassetExample:DomesticcurrencyreturnsonanintwoforeignAeuro-basedinvestorhasa75%positioninGBPdenominatedassetsanda25%positioninUSDdenominatedassets.Theresultsforthepastyeararethefollowing.RFCfortheGBPassets RFCfortheUSDassets 5%BeginningEUR/GBPexchangerate:0.8572EndingEUR/GBPexchangerate:0.8404BeginningUSD/EURexchangerate:1.332EndingUSD/EURexchangerate:1.324Calculatetheinvestor'sreturnovertheperiodindomestic(EUR)currencyterms.Example:Domesticcurrencyreturnsonanintwoforeign,calculatetheRDC(inEUR)foreachinvestmentFortheinvestmentdenominatedinGBP,wehave:RDC1.120.84040.8572 1.12000.9804 Theforeigncurrency(GBP)hasdepreciatedapproximay2%relativetotheeuro.Thenegativecurrencyreturnreducesthe12%returnoftheforeignmarket.FortheinvestmentdenominatedinUSD,theexchangeratesweregivenwiththeforeigncurrency(USD)inthenumerator.Thesecanbeinvertedtomaketheinvestor'scurrency(theeuro)thepricecurrencyandtheforeigncurrency(USD)thebasecurrency.1/1.332=0.75081/1.324=0.7553【梦轩考 专业提供CFAFRM全 Example:DomesticcurrencyreturnsonanintwoforeignAllowingtheinvestmentdenominatedinUSDRDC(inEUR)tocalculated 1.05 1.05001.0060 Theforeigncurrency(USD)hasappreciatedapproximay0.6%relativetotheturn.Thepositivecurrencyreturnincreasesthe5%returnoftheforeignmarket.Theinvestor’stotalportfolioreturnistheweightedaverageoftheRDˈForeaarket:0.75 0.255.63% 7.351.41InvestinginaforeigndenominatedThefluctuationoftheforeignThefluctuationinforeigncurrencypriceoftheforeignVarianceforatwoasset2(R 2(R 2(R)2(R)(R)(R,R FCisthecorrelationbetweenRFCandVarianceforoneasset (RFX)(1RFCRiskstodomesticDependsonthestandarddeviationofRFCandMaybehigherforourdomesticinvestorbecausestandarddeviationofRFXisanadditivetermintheequation.However,correlationalsomatters.IfthecorrelationbetweenRFCandRFXisnegative,thethirdcomponentofthecalculationesnegative.ThecorrelationmeasurestheinteractionofRFCandRFXIfthecorrelationispositive,thenRFCreturnsareamplifiedbyRFXreturns,increasingthevolatilityofreturntoourdomesticIfthecorrelationisnegative.thenRFCreturnsaredampenedbyRFXreturns,decreasingthevolatilityofreturntoourdomesticinvestor.(Thisisdiscussedfurtherunderthethisreading'stopicofminimumvariancehedgeratio).【梦轩考 专业提供CFAFRM全 IfRFCisaRisk-FreeReturn:itsstandarddeviationandwithRFXare(RDC (RFX)(1RFCRFCthereturnonaforeigncurrencydenominatedrisk-freeStrategicArgumentsfornothedgingcurrencyItisbesttoavoidthetimeandcostofhedgingorInthelong-run,unhedgedcurrencyeffectsarea“zero-sumgame”;ifonecurrencyappreciates,anothermustdepreciate.Inthelong-run,currenciesreverttoatheoreticalfairArgumentsforactivemanagementofcurrencyIntheshortrun,currencymovementcanbeextreme,andinefficientpricingofcurrenciescanbeexploitedtoaddtoportfolioreturn.Manyforeignexchange(FX)tradesaredictatedbyinternationaltradetransactionsorcentralbankpolicies.Thesearenotmotivatedbyconsiderationoffairvalueandmaydrivecurrencypricesawayfromtheirfairvalue.StrategicCurrencymanagementPassiveapproach:matchingbenarkcurrencyActivestrategy:treatscurrencyexposureindependentlybenarkexposuresandseekstoprofitfrom(ratherthanhedgeof)currencyPassiveRulebased,matchestheportfolio'scurrencyexposuretothatofthebenark.ItwillrequireperiodicrebalancingtomaintaintheThegoalistoeliminatecurrencyriskrelativetotheDiscretionaryallowsthemanagertodeviatefrompassivehedgingbyspecifiedpercentage.E.g.allowing5%deviationsfromhedgeratiothatwouldmatchacurrency'sexposuretothebenarkexposure.Thegoalistoreducecurrencyriskwhileallowingmanagertopursue odestincrementalcurrencyreturnsrelativetothebenark.【梦轩考 专业提供CFAFRM全 StrategicActivecurrencyallowsamanagertohavegreaterdeviationsfrombenarkcurrencyexposures.Thisdiffersfromdiscretionaryhedgingintheamountofdiscretionpermittedandthemanagerisexpectedtogeneratepositiveincrementalportfolioreturnfrommanagingaportfolio'scurrencyThegoalistocreateincrementalreturn(alpha),nottoreduceCurrencyabroadtermcoveringtheoutsourcingofcurrencyAttheextreme,theoverlaymanagerwilltreatcurrencyasassetclassandmaytakepositionsindependentofportfolioSeekingincrementalreturn,anoverlaymanagerwhoisbearishontheSwedishkrona(SEK)foraportfoliowithnoexposuretotheSEKwouldshorttheSEK.Themanagerispurelyseekingcurrencyalpha(incrementalreturn),notriskStrategicDecisions:Theaccount'spolicyonwhethertohedgeornottohedgecurrencyriskshouldberecordedintheclient'sinvestmentpolicystatementSectionsoftheIPSthatwillbeparticularlyrelevantinreachingthisstrategicdecisionincludeinvestorobjectives(includingrisktolerance),timehorizon,liquidityneeds,andthe arktobeused yzingportfolioTheIPSshouldalsoThepercentageofcurrencyexposurethatistobeAllowablediscretionforthemanagertovaryaroundthisFrequencyofrebalancingtheBenarkstouseforevaluatingtheresultsofAllowable(orprohibited)hedgingStrategicStrategicDiversificationInthelongerrun,currencyvolatilityhasbeenlowerthanintheshortrun,reducingtheneedtohedgecurrencyinportfolioswithalong-term.Positivecorrelationbetweenreturnsoftheassetmeasuredintheforeigncurrency(RFC)andreturnsfromtheforeigncurrency(RFX)increasevolatilityofreturntotheinvestor(RDC)andincreasetheneedforcurrencyhedging.Negativecorrelationdampensreturnvolatilityanddecreasestheneedtohedge.Correlationtendstovarybytimeperiod,providingdiversificationinsomeperiodsandnotinothers,suggestingavaryinghedgeratioisEmpiricalevidenceindicateshigher,positivecorrelationinbondsthaninequityportfolios,suggestingthathedgingismoreappropriateforbondportfolios.Thismakestheoreticalsensebecauseinterestratemovementtendstodrivebothbondpricesandcurrencyvalues.Thehedgeratio(thepercentageofcurrencyexposuretohedge)variesbymanagerpreference.【梦轩考 专业提供CFAFRM全 StrategicStrategicCostThebid/askedtransactioncostonasinglecurrencytradeisgenerallysmall,butrepeatedtransactioncostsaddup.Fullhedgingandfrequentrebalancingcanbecostly.Purchasingoptionstohedgeinvolvesanupfrontoptionpremiumcost.Iftheoptionexpiresout-of-the-money,thepremiumislost.Forwardcurrencycontractsareoftenshortertermthanthehedgingperiod,requiringcontractsberolledoverastheymature(anFXswap).Thehedgelowersreturnvolatilitybuttherollovercancreatecashflowvolatilitywithrealizedgainsandlossesonthematuringcontracts.Financingcashoutflowswheninterestratesarehighcanbecostlyastheinterestthatwouldhavebeenearnedonthefundsislost.StrategicStrategiccostOverheadcostscanbehigh.Abackofficeandtradinginfrastructureareneededforcurrencyhedging.Cashaccountsinmultiplecurrenciesmayhavetobemaintainedtosupportsettlementsandmarginrequirements.Onehundredpercenthedginghasanopportunitycostwithnopossibilityoffavorablecurrencymovement.Somemanagerselectto"splitthedifference"between0and100%hedgingandadopta50%strategichedgeratio.Hedgingeverycurrencymovementiscostlyandmanagersgenerallychosepartialhedges.Theymayhedgeandrebalancemonthlyratherthandailyoracceptsomeamountofnegativecurrencyreturnratherthanzero.StrategicDecisions:currencymanagementFactorsshiftthestrategicdecisionAshorttimehorizonforportfolioHighriskAclientwhoisunconcernedwiththeopportunitycostsofmissingpositivecurrencyreturnsHighshort- eandliquiditySignificantforeigncurrencybondLowhedgingClientswhodoubtthebenefitsofdiscretionary【梦轩考 专业提供CFAFRM全 TacticalCurrencyEconomicfundamentals:assumesthat,inthelongterm,valuewillconvergetofairIncreasesinthevalueofacurrencyareassociatedwithMoreundervaluedrelativetotheirfundamentalWiththegreatestrateofincreaseintheirfundamentalWithhigherrealornominalinterestWithlowerinflationrelativetootherOfcountrieswithdecreasingriskOppositeconditionsarebelievedtobeassociatedwithdecliningcurrencyvaluesTacticalCurrencyTechnicalysisbasedonthreePastpricedanpredictfuturepricemovementandbecausethosepricessuchinformation.Falliblehumanbeingsreacttosimilareventsinsimilarwaysandthereforepastpricepatternstendtorepeat.Itisunnecessarytoknowwhatthecurrencyshouldbeworth(basedonfundamentalvalue);itisonlynecessarytoknowwhereitwilltrade.TypicalpatternsthattechniciansseektoAnoverbought(oroversold)markethasgoneup(ordown)toofarandthepriceislikelytoreverse.Asupportlevelexistswheretherearesubstantialbidsfromcustomerstobuy.Apricethatfallstothatlevelisthenlikelytoreverseandbouncehigherasthepurchasesareexecuted.Alevelexistswheretherearesubstantialoffersfromcustomerstosell.Apricethatrisestothatlevelisthenlikelytoreverseandbouncelowerasthesalesareexecuted.TacticalCurrency ysislooksatpastpriceandvolumetradingdata.FX ysisfocusesonpricetrendsasvolumedataisgenerallylessavailable.Technicalysisworksbestinmarketswithidentifiabletrends.Atbothsupportandlevels,theprice es"sticky."However,ifthemarketmovesthroughthestickylevels,itcanthenaccelerateandcontinueinthesamedirection.Movingaveragesofpriceareoftenusedintechnicalysis.Acommonruleisthatifashorter-termmovingaveragecrossesalonger-termmovingaverage,ittriggersasignal.【梦轩考 专业提供CFAFRM全 TheCarryAcarrytradereferstoborrowinginalowerinterestratecurrencyandtheproceedsinahigherinterestrateCoveredinterestrateparity(CIRP)holdsbyarbitrageandestablishesthatthedifferencebetweenspot(So)andforward(Fo)exchangeratesequalsthedifferenceintheperiodicinterestratesofthetwocurrencies.Thecurrencywiththehigherinterestratewilltradeataforwarddiscount,F0<SoThecurrencywiththelowerinterestratewilltradearapremium,Fo>Thecarrytradeisbasedonaviolationofuncoveredinterestrateparity(UCIRP).Ifthisweretrue:ThecurrencywiththehigherinterestratewilldecreaseinvaluebytheamountoftheinitialinterestratedifferentialThecurrencywiththelowerinterestratewillincreaseinvaluebyamountoftheinitialinterestrateIftheseexpectationsweretrue,acarrytradewouldearnazeroTheCarryBecausethecarrytradeexploitsaviolationofinterestrateparity,itcanbereferredastradingtheforwardratebias.Historicalevidenceindicatesthat:Generally,thehigherinterestratecurrencyhasdepreciatedlessthanpredictedbyinterestrateparityorevenappreciatedandacarrytradehasearnedaprofit.However,asmallpercentageofthetime,thehigherinterestratecurrencyhasdepreciatedsubstantiallymorethanpredictedbyinterestrateparityandacarrytradehasgeneratedlargeFXCarryExampleCarryInterestRates CurrencyPair ExchangeRates OneyearlaterU.K. U.S.ComputetheprofittoaninvestorborrowingintheUnitedStatesandintheAnswer:return=interestearnedoninvestment–fundingcost-currencydepreciation=3%-1%-0%=2%Theriskisthatthefundingcurrencymayappreciatesignificantlyagainstthecurrencyoftheinvestment【梦轩考 专业提供CFAFRM全 CarryTrade:ThespotexchangerateisBRL/USD2.41.Theinterestratesintwocountriesare6%and1%,Estimatetheone-yearforwardexchangeratefortheBrazilianStatethestepstoinitiatethecarrytradeandthetheoryonwhichitisbased.Whatistheprofitonthetradeifthespotexchangerateisunchangedandthetradeisinitiatedbyborrowing100currencyunits?Showyourwork.WhatistheprimaryriskinthisCarryTrade:1.TheforwardexchangeratefortheRealshouldbeapproximay5%belowthecurrentspotexchangeratetoreflecttheinitialinterestratedifferential.Theprecisecalculationis:BRL/USD2.41x(1.06I BRL/USDBorrowUSDat1ConvertUSDtoBRLatthespotexchangerateBRL/USDInvesttheBRLatThecarrytradeisbasedonaviolationofuncoveredinterestrateparity.Itisprofitableifthespotexchangerateofthehigherinterestratecurrencydeclineslessthanpredictedbytheforwardexchangerate.CarryTrade:3.Itis5%,reflectingtheinitialinterestratedifferenceandunchangedspotexchangerate.BorrowUSD100creatingaloanpayableofUSDConvertUSD100toBRL241 100xInvesttheBRL241at6%creatinganendingvalueofBRLConverttheBRL255.46attheunchangedspotexchangeratebacktoUSD106.00( 255.46I2.41).PayofftheUSDloanforaprofitofUSD5.00onaUSD100initialinvestment.4.ThisisanunhedgedtradeandtheprofitorlossdependsoningvalueoftheBRL.IftheBRLdeclinesbymorethan5%,thetradeisunprofitable.【梦轩考 专业提供CFAFRM全 TheCarryTrade:Generally,thecarrytradeisimplementedbyborrowinginthelowerinterestratecurrenciesofemergingeconomies(investingInperiodsoffinancialstress,thecurrenciesofthehigherriskemergingeconomieshavedepreciatedsharplyrelativetothecurrenciesofdevelopedeconomiesandsuchcarrytradeshavegeneratedsignificantlosses.Giventhatperiodsoffinancialstressareassociatedwithincreasingexchangerarevolatility,tradersoftenexittheircarrytradepositionswhenexchangeratevolatilityincreasesSummarySummaryoftheCarryTheIsBorrowingTobuyandInnormalthensellinginthehigherconditionswiththespotcurrencythelowerButcanlargelossesinoffinancialdistressandhighvolatilityasinvestorsfleehighrisk(yield)currenciesIstradingtheforwardrateSellinginthespotmarketthecurrencytradingatAndbuyinginthespotmarketthecurrencytradingatforwardEquivalenceofCarryTradeandtradingtherate i)( FP/ SP/ SP/ i( BWhenthebasecurrencyhasalowerinterestratethanthepricecurrency(therightsideispositive)thebasecurrencywilltradeataforwardpremium(theleftsideispositive).Beinglow-yieldcurrencyandtradingataforwardpremium.Beinghigh-yieldcurrencymeanstradingataforwarddiscount.Borrowinginthelow-yieldcurrencyandinvestinginthehighyieldcurrency(carrytrade)ishenceequivalenttosellingcurrenciesthathaveaforwardpremiumandbuyingcurrenciesthathaveaforwarddiscount(tradingtheforwardratebias).【梦轩考 专业提供CFAFRM全 VolatilityDeltahedgingentailscreationofadelta-neutralpositionThedelta-neutralpositionwillnotgainorlosevaluewithsmallchangesinthepriceoftheunderlyingassets,butitwillgainorlosevalueastheimpliedvolatilityreflectinthepriceofoptionLongstraddle:managerexpectingvolatilitytoincreaseshouldenteralongstraddlebypurchasinganat-the-moneycallandput.OptionwillriseinnetvalueandthetradewillbeprofitableasvolatilityincreasesVolatilityShortstraddle:managerexpectingvolatilitytodecreaseenterashortstraddlebysellinganat-the-moneycallandTheoptionsfallinnetvalueasvolatilityTheoptionscanberepurchasedatlowerpricesforaStrangle:Ourof-the-moneycallsandputswiththesameabsolutedeltaarepurchased,providesimilarbutmoremoderatepayoffstoastraddle.Theout-of-the-moneyoptionsrequirelargermovementinthecurrencyvaluetocreateintrinsicvaluebutwillcostless.BoththeinitialcostandthelikelyprofitarelowerthanfortheFactorsFactorsaffecttacticaltradingReducethehedgeonorincreasethelongpositioninthecurrencyIncreasethehedgeonordecreasethelongpositioninthecurrencyLongstraddle(orShortstraddle(orAcarryDiscontinuethecarry【梦轩考 专业提供CFAFRM全 FactorsaffecttacticaltradingSubtlevariationsontheseAcarrytrademayinvolveabundleoffundingandinvestmentcurrenciesandpositionsneednotbeequallyweighted.Forexample,ifthemanagerexpectsaparticularcurrencytoshowgreaterrelativeincreaseinvalue,thetradewouldbestructuredwithincreasedlong(ordecreaseshort)positionsinthatDeltaneutralpositionsca