Anyone else do this one? 30 marks on the effect of stagflation and hyperinflation on asset classes was unexpected in a I'm kind of expecting it sort of way. Likewise the 20 odd marks on banking regulation and capital adequacy was doable particuarly if anyone looked at some of the ST9 books. Probably a slightly higher pass mark than Sep 09?
Anyone remembering how they answered the following. -three ways of creating the exposure as the fund I used Credit derivatives -risks in the loan fund -Disadvantages of the property structure -Discussing move into new 10 day notice accounts
I'm also interested in what people answered for the property fund structure. I answered that its an OTC property option with bonds, and then discussed that slightly. I also used credit derivatives for the alternative to that fund in question 2. I battled to give sufficient advantages and disadvantages to each because all the alternatives, mimicking the same thing, had the same +'s and -'s (which I did not repeat). Any estimates on the pass mark?
For the alternative exposures to the fund question, I also used Credit derivatives. I think I put 1) buy the underlying bonds directly, 2) sell CDS's, 3) invest in CDO 4) invest in exchange traded single tranche trading CDS's. For the property fund question I wrote something about property index swaps and other property derivatives. I couldn't figure out how the fund could guarantee a 7.5% return unless this was some sort of proxy for the swap rate for the fixed part of the swap. Disadvantages I put were lack of control over areas invested and concerns over the impact of poor manager performance on the overall return. For the other parts I focussed quite a bit on liquidity and funding risks as well as credit quality of the transactions. Also touched on ethical issues and mandate constraint issues.
I don't think it actually is possible for them to guarantee that 7.5%. [I assumed a 3-year guarantee of 7.5% - not per annum. The question did not state that the return was per annum]. That was my main disadvantage - to offer such a high guarantee, the fund needed to be almost 100% bonds, which leaves 0 exposure to property. Your stance of using swaps would give the same result - you would need to swap almost all of the property return to receive that fixed rate. Of-course if they don't do this, then the clear knock-on disadvantage is a high probability of default. Maybe that's what they wanted?
For the loans fund replication I used 1-a CDS on a similar credit exposure, government bonds or high qaulity corporate bonds, and an interest rate swap to swap fixed for floating 2-A CDO with a similar credit exposure and an interest rate swap to swap fixed for floating 3-A total return swap on a basket of credit instruments with funds invested in appropriate fixed income instruments to generate the outgoing cash flows. I also believe risks were quite similar like a specific structure not being available at favourable rates depending on prevailing credit conditions, counter party risks, mark to market risk for bonds and credit risk for corporate bonds. For the loans fund risks, I mentioned that the fund may need to keep provisions for bad loans which will make fund valuation difficult. I don't know how if its true.
