There are a laundry list of reasons and it seems like some of these are just re-wording of the same thing. So if the AM exam asks for TWO reasons, I don’t want to restate myself.
These are my Kaplan Notes/Notes from Doing Mocks:
1.) Portfolio/Index correlation not equal to 1 (different underlyings of each, portfolio has non systematic risk) - I thought this was corrected with Yield Beta for duration
2.) Beta and Duration relationship change over time
3.) Beta and Duration do not move as predicted (same as above…?)
4.) Beta and Duration are difficult to measure precisely.
5.) Sold before/Held after expiration
6.) # of contracts rounded
7.) Arbitrage did not hold
Anyone else have any thoughts?
9.) If anything can go wrong it will go wrong
Your #8 is the same thing as #1
i think basis risk is a consequence of imperfect hedge not a cause.
Yepp. But sounds smarter. Lol!
What happened before, an egg or a chick?
Turbo, you will probably not be required to state more than 8 reasons. At least, who would grade this?
No i know lol, but dont they all say the same thing? Using Beta to determine the number of contracts doesn’t work perfectly since the index and underlying are not the same?
The reason I ask is when you grade your AM exam, using the CFAI guideline answers, not one answer will ever match their exact definition. So for grading purposes, what constitutes “close enough”?
I dunno. But with more than 50 % passing rate, I suppose they are not so rigorous for closely matching the answers.
What is the difference between basis risk and cross hedge risk in the context of the derivatives reading? Kaplan uses the term interchangeably in the Secret Sauce.
I haven’t heard for cross hedge risk but know for cross hedge so suppose it is basis risk related to cross hedge. 