CFA Mock 2020 Q.7Ci

CFA Level III
#1

NorthWake has expressed interest in strategies that benefit from a stable yield curve. By
mandate, NorthWake cannot invest in non-local currency instruments. NorthWake also has a bias
towards income over price appreciation, and prefers to not use derivatives.

7C i) Identify a strategy that would be consistent with NorthWake’s preferences and
restrictions.

The answer suggests selling convexity, buying bonds with embedded options. The question however states he prefers to not use derivatives. Have I missed something here?

#2

Using bonds with embedded options is a time-honored method to get around restrictions against using derivatives. They’re not derivatives. They’re just bonds. Yeah . . . that’s the ticket! . . . just bonds.

1 Like
#3

Would a buy and hold strategy not be just as preferable here then?

#4

That depends on the investor’s goals.