Sabanai Investimentos Case Scenario

CFA Level III Portfolio Management
#1

CFA practice question asset allocation (2) Sabanai Investimentos Case Scenario question 6. Why does strategy 2 do not exploit market views?

#2

Why won’t you just post the question here ?

#3

Currency Pair Current Spot Rate Six-Month Forward Rate Six-Month Forecast Spot Rate

BRL/AUD 2.1046 2.1523 2.0355

BRL/CHF 2.5309 2.4641 2.5642

  • Strategy 2: For CHF exposure, the appropriate strategy is to be long put options at a strike price of 2.5309, short put options with a strike price 2.5049, and short call options with a strike price of 2.5669.
  • Is Campos most likely correct that Strategy 2 will accomplish the goals of exploiting market views and reducing hedging costs?
#4

Strategy 2 - Wrong - Does the opposite of exploiting market rates

AUD: Own-Owe= 2.0355 - 2.1523 = -ve -> so “PUT” it => ~0.1168

CHF: Own-Owe= 2.5642 - 2.5309 = +ve -> so “CALL” => ~0.0333

#5

At a high level:

Strategy 2 is a seagull spread which is just a cheap protective put at 2.5309. You can ignore the other stuff because all it does is make the put cheaper and adds some boundries.

Here, your 6 month forecast is that the CHF will appreciate to 2.5642 vs the marketing thinking depreciation to 2.4641. Why would you waste money on buying the put which would be following the market view rather than exploiting it.

#6

125 mph, It’s still not clear to me- can you elaborate on it please?

#7

It’s pretty simple but it looks complicated.

If you think (as you have forecasted it) that the exch. rate will appreciate and marketing believes it will depreciate, to benefit from this arbitrage, you will want to exploit this position by leaving the position as-is (unhedged), having more BLR in six months when Fx appreciates (as you believe your forecast is accurate)

If you enter this fabulous seagull spread, all you will do is grab yourself some cheap downside protection, which is totally unneccessary as you believe the Fx will appreciate.

Besides, by entering seagull, your upside on the Fx will be capped as you have unnecessarily sold OTM call.

All in all, this strategy would be profitable if you forecasted depreciation of the Fx, and the market believed in appreciation.

Just a small edit: Seagull apread in this case = long ATM put, short OTM put and short OTM call. (Shorting these two OTM makes buying ATM cheaper), but again, totally unnecessary in this case as you dont expect fall in fx, but rise.