A few questions

[abumenang]

Hi there

I have a few questions I was hoping I could get some help with:

1) On the topic of tracking an index synthetically using derivatives, I understand the concept, for example entering into a swap arrangement which gives the same desired results. However, I'm finding it hard to imagine how this is done. Can someone explain how this happens please, as in how will the swap be set up to anticipate the movements of the index etc? Am I overcomplicating this?

2) In Booklet 6, Q17, the solution states that the PER is a multiple of 8. I can't see where this is coming from?

3) There are 2 ALM processes, one in chapter 17 which consists of 4 steps. The other one is in chapter 18 which is longer and is an example of the ALM process of a DB fund. I notice that when asked in exam questions, the latter process (chapter 18) is given and tailored to the question, which is logical since it is the more explanatory version. I am just afraid that the examiners may be looking for the first process (chapter 17), is there a keyword in the question perhaps that I am failing to spot? Would i be penalised for giving both definitions?

Thank you.

 

[Colin McKee]

questions

See below for thoughts:


1) On the topic of tracking an index synthetically using derivatives, I understand the concept, for example entering into a swap arrangement which gives the same desired results. However, I'm finding it hard to imagine how this is done. Can someone explain how this happens please, as in how will the swap be set up to anticipate the movements of the index etc? Am I overcomplicating this?


I think the rough idea is that you get a fund, fill it with cash earning LIBOR, and then add a swap which pays LIBOR and receives the return on the FTSE100. Hey presto the fund is a tracker. Probably more difficult in practice.


2) In Booklet 6, Q17, the solution states that the PER is a multiple of 8. I can't see where this is coming from?

I thnk this is just maket cap 200 divided by earnings 25

3) There are 2 ALM processes, one in chapter 17 which consists of 4 steps. The other one is in chapter 18 which is longer and is an example of the ALM process of a DB fund. I notice that when asked in exam questions, the latter process (chapter 18) is given and tailored to the question, which is logical since it is the more explanatory version. I am just afraid that the examiners may be looking for the first process (chapter 17), is there a keyword in the question perhaps that I am failing to spot? Would i be penalised for giving both definitions?

Yes - the long one is steps of ALM. The four step version is a higher level look at risk budgeting, a part of whihc would be running a full ALM. So they are linked but not the same.