AFIN8099: Current Issues in Banking and Finance – Tutorial Homework #3 • Weighting: 5% • Total marks: 20 Instructions • Attempt all the questions and read each carefully. • Show all working out – full...

The unit name is current issues in Banking and finance


AFIN8099: Current Issues in Banking and Finance – Tutorial Homework #3 • Weighting: 5% • Total marks: 20 Instructions • Attempt all the questions and read each carefully. • Show all working out – full marks cannot be awarded unless it is shown. • You are welcome to type your assignment or write it out by hand. Either is fine. • Save your work as a PDF with the following document title: Name_Surname_StudentID. Question 1 (2 marks): Suppose a fund manager based in Europe is expected to pay distributions to their clients in EUR. The portfolio, however, has unhedged exposures to fixed income securities denominated in USD. The information below reports the fund manager’s recent monthly return. Derive the true underlying alpha for the fund after adjusting for the currency impacts: 1 Month Performance Total Return 1.65% Benchmark Return 1.47% EUR/USDt−1 $1.07 EUR/USDt+0 $1.19 Unhedged Proportion of Portfolio 26.7% Question 2 (5 marks): You are given information concerning a series of fixed-rate bonds that constitute a portfolio. Assume each security has a face value of $100 and pays coupons semi-annually. Derive the portfolio’s metrics: Holdings $ Investmentweights % Coupon % Yield to Maturity % Duration (Years) Bond 1 $25,000,000 – 2.75% 1.16% 3.60 Bond 2 $75,000,000 – 3.10% 2.22% 4.52 Bond 3 $200,000,000 – 1.65% 1.89% 9.96 Bond 4 $60,000,000 – 0.75% 1.02% 2.78 Bond 5 $175,000,000 – 2.25% 2.45% 6.65 Portfolio – – – – – Question 3 (3 marks): Following on from Question 2 , derive the portfolio’s modified duration and compute the sen- sitivity of the portfolio to a change in its yield to maturity. Assume a change of 35bps occurs in either direction. For this exercise, the portfolio’s aggregate value is $100 and there is no convexity. 1 Question 4 (2 marks): Recompute the metrics of the portfolio in Question 2 assuming each security contributes equally to the portfolio. Discuss why the equally weighted portfolio is an effective attribution tool? Question 5 (4 marks): Explain how the spread duration of a fixed income portfolio can be used to position the portfolio for a change in economic conditions. Specifically, discuss what a portfolio manager could do if they expect economic con- ditions (increasing default rates and widening credit spreads) to deteriorate. Refer to the current economic climate and discuss why maximisation/minimisation optimisation methods don’t often work in reality? Question 6 (3 marks): You are given the 5-year return covariance of each bond with the return on the ASX/S&P 200. Assume the return variance of the ASX/S&P 200 over the last 5 years has been 0.26, compute the credit beta of the portfolio: Investment weights % 5 Year ReturnCovariance Credit Beta Bond 1 28% 0.56 – Bond 2 14% 1.13 – Bond 3 22% –0.23 – Bond 4 17% –1.60 – Bond 5 19% 2.23 – Portfolio – – – Question 7 (1 marks): Following on from Question 6 , discuss what the credit beta of the portfolio signifies – Is the portfolio historically more, less, or equally as risky compared to the stock market? Has it provided defensive benefits? /End of assignment 2