2012 AM session, question 8: needlessly convoluted solution

CFA Level III Derivatives
#21

i did it exactly the way it was done in the answer provided by the institute and this is the way they do it in the curriculum.

#22

S2000,

As you pointed out it is a needlessly convoluted solution - that is the method provided in the books as the approach.

I am not sure if “solving” the problem the way I showed a couple of posts above (using $Duration and $beta) in a single step solution would get the necessary points.

What do you think?

#23

The question reads:

_ Determine the action (buy or sell) and the number of futures contracts required to achieve the:_

i. equity targets

ii. bond targets.

_ Show your calculations._

The solution summarizes with:

To achieve the equity targets, Bob (not his real name) should sell xxx equity future contracts.

I’d say that if you showed the calculations you (and I) outlined above and wrote a summary sentence such as this, you’d get full points. The question does not say that you have to achieve the targets separately, and, indeed, concludes that you do not, as it combines the steps into a single transaction.

#24

And there’s no problem doing it that way, except that it takes longer and, to some, may be confusing.

#25

Anything that makes the curriculum more clear (and is a true representation of the actual economics) is helpful from a learning perspective.

After re-reading the chapter this morning, I can see a reason why they might have chosen to teach all examples in this fashion. They go over an example (p 339 v5) where a PM seeks to reduce the beta of large caps and increase the exposure to mid caps using futures - with different contracts on each.

Clearly, these are different transactions in which the test taker would have to realize that you legitmately need to make two different transactions. On the following page is the example exactly like the one above. Knowing this, I can see how CFAI would just want to teach everything in the same linear fashion rather than going through all the examples and then using the $ beta/ duration concept for the example above. It all comes back to an overall understanding of what you’re trying to accomplish rather than rote memorization

#26

Amen!