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##### CFA Examination Level II Problems

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Question;Chapter 23 question 22. CFA Examination Level IITo protect the value of the Star Hospital Pension Plan's bond portfolio against the rising interest rates that she expects, Sandra Kapple enters into a one-year pay fixed, receive floating U.S. LIBOR interest rate swap, as described in the following table.U.S. LIBOR Interest Rate Swap Terms1-year Fixed Rate (annualized) 1.5%90-day U.S. LIBOR Rate [L0(90)] (annualized) 1.1%Notional Principal \$1Day Count Convention 90/360________________________________________Note: Li(m) is the m-day LIBOR on Day i.Sixty days have passed since initiation of the swap, and interest rates have changed. Kapple is concerned that the value of her swap has also changed. The U.S. LIBOR term structure and present value factors of interest rates are described in this table:U.S. LIBOR TERM STRUCTURE AND PRESENT VALUE FACTORS (60 DAYS AFTER SWAP INITIATION)U.S. LIBOR Term Structure (annualized) Present Value FactorsL60(30) = 1.25 percent 0.9990L60(120) = 1.50 percent 0.9950L60(210) = 1.75 percent 0.9899L60(300) = 2.00 percent 0.9836________________________________________Note: Li(m) is the m-day LIBOR on Day iCalculate the dollar market value of the interest rate swap entered into by Kapple, at 60 days after the initiation of the swap and using a \$1 notional principal. Show your calculations.Note: Your calculations should be rounded to 4 decimal places.Chapter 21 questions 2 & 82. You are a coffee dealer anticipating the purchase of 82,000 pounds of coffee in three months. You are concerned that the price of coffee will rise, so you take a long position in coffee futures. Each contract covers 37,500 pounds, and so, rounding to the nearest contract, you decide to go long in two contracts. The futures price at the time you initiate your hedge is 55.95 cents per pound. Three months later, the actual spot price of coffee turns out to be 58.56 cents per pound and the futures price is 59.20 cents per pound.a. Determine the effective price at which you purchased your coffee. How do you account for the difference in amounts for the spot and hedge positions?b. Describe the nature of the basis risk in this long hedge.8. An investment bank engagesin stock index arbitrage for its own and customer accounts. On a particular day, the S&P index at the New York Stock Exchange is 602.25 when the futures contract for delivery in 90 days is 614.75. If the annualized 90-day interest rate is 8.00 percent and the (annualized) dividend yield is 3 percent, would program trading involving stock index arbitrage possibly take place? If so, describe the transactions that should be undertaken and calculate the profit that would be made per each ?share? of the S&P 500 index used in the trade.Chapter 24 question 4CMD Asset Management has the following fee structure for clients in its equity funds1.00% of first \$5 million invested0.75% of next \$5 million invested0.60% of next \$10 million invested0.40% above \$20 milliona. Calculate the annual dollar fees paid by Client 1, which has \$27 million under management, and Client 2, which has \$97 million under management.b. Calculate the fees paid by both clients as a percentage of their assets under management.c. What is the economic rationale for a fee schedule that declines (in percentage terms) with increases in assets under management?

Paper#48951 | Written in 18-Jul-2015

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