CFA CFA level 3 CFA level 3 CFA level 3 CFA level 3 CFA level 3 CFA level 3 finquiz item set questions, study session 7, reading 19

Reading 19

Currency Management: An Introduction

FinQuiz.com


 

FinQuiz.com
CFA Level III Item-set - Question
Study Session 9
June 2018

Copyright © 2010-2018. FinQuiz.com. All rights reserved. Copying, reproduction or
redistribution of this material is strictly prohibited.

FinQuiz.com © 2018 - All rights reserved.


Reading 19

Currency Management: An Introduction

FinQuiz.com


 

FinQuiz Item-set ID: 19189
Questions 1(19190) through 6(19195) relate to Reading 19

Dependable Associates Case Scenario
Dependable Associates is an investment management firm running its own currency overlay
program. The firm’s reporting currency is the US dollar (USD). Ivan Waugh is Dependable’s
most senior currency analyst who overlooks the overlay program. Waugh is analyzing the firm’s
existing and proposed currency exposures.
Exactly one month ago, Dependable entered into a 3-month INR/USD forward contract to hedge
exposure to the Indian Rupee (INR) with an underlying notional principal of INR 10 million.
However, since then the value of the position has increased. Details on spot and forward rates
including forward points have been summarized in the Exhibit below.
Exhibit:
Spot & Forward Rates & Forward Points for the
INR/USD Forward Contract
One Month Ago
Today
Value of assets (INR)
10.0 million
12.5 million
Mid-market spot rate (INR/USD)
59.99
58.55
Three-month forward points
1070/1454
Two-month forward points
1006/1415
Next, Waugh examines an ATM call option position the firm has undertaken on the SGD/USD.
Waugh feels that the current position is expensive and that the firm will need to modify its
strategy even if this requires sacrificing upside potential. The current SGD/USD spot rate is 1.17
and Waugh expects this rate to appreciate over the next six months.
Finally, Waugh concludes his analysis by examining two emerging market trades; one of these

investments is denominated in Sri Lankan Rupees (LKR) while the other is denominated in the
Thai baht (THB).
Waugh believes that real value of the LKR/USD cross rate will not converge to its fair value
over the long-run. Furthermore, Waugh believes that the volatility of the cross rate is expected to
increase over the coming months but is unsure of the direction the exchange rate will take. He
would like to hedge the firm’s exposure to the LKR while keeping costs to a minimum. The
current LRK/USD spot rate is 132.996.
The other emerging market currency trade is denominated in the Thai baht (THB) and involves
the THB/USD cross rate. The Thai authorities have imposed capital controls in an effort to
promote domestic economic growth. Waugh has invested in Thai equities and forecasts the THB
to depreciate as a result of the policy change.

FinQuiz.com © 2018 - All rights reserved.


Reading 19

Currency Management: An Introduction

FinQuiz.com


 
FinQuiz Question ID: 19190

1.   Dependable’s original position in the INR/USD contract would have involved:
A.   selling INR 10.0 million spot at an all-in rate of INR/USD 60.10.
B.   selling INR 10.0 million forward at an all-in rate of INR/USD 60.14.
C.   buying INR 12.5 million forward at an all-in rate of INR/USD 58.65.
FinQuiz Question ID: 19191

2.   To rebalance the hedge Waugh is required to:
A.   sell INR 2.5 million in the forward market.
B.   purchase INR 2.5 million in the spot market.
C.   purchase INR 2.5 million in the forward market.
FinQuiz Question ID: 19192

3.   Using the data provided in the Exhibit, at the time of rebalancing the roll yield is most likely:
A.   zero.
B.   positive.
C.   negative.
FinQuiz Question ID: 19193

4.   Considering Waugh’s expectations and requirements, which of the following SGD/USD
option positions will provide the strongest protection?
A.   long a 25-delta risk reversal.
B.   long a call option with a strike rate of 1.10.
C.   short put and call options with strike rates of 1.13 and 1.20, respectively; long a call
option with a strike rate of 1.17.
FinQuiz Question ID: 19194

5.   With respect to the LKR/USD investment, Waugh should most likely:
A.   long a 132.996 call option; long a 132.996 put option.
B.   long a 133.463 call option; long a 132.529 put option.
C.   long a 133.463 call option; short a 132.529 put option.
FinQuiz Question ID: 19195

6.   Based on the expectation for the THB/USD rate, Waugh should take a:
A.   long position in a ATM call option.
B.   short position in a 25-delta put option.

C.   long position in a non-deliverable forward (NDF) contract.

FinQuiz.com © 2018 - All rights reserved.