Real World Issues Real-world events often cause deviations from the optimal asset allocation the mathematical calculations of modern portfolio theory suggest. This section delves into the reasons behind these deviations and explores the timing and circumstances in which they occur….

Liability-relative approaches first view the cash flows of the sponsoring organization in question and then attempt to build a portfolio of securities that will satisfy these payments as they come due. This is in contrast to the popular asset-only approach…

The global market portfolio is the weighted sum of every asset globally. It represents a well-diversified asset allocation that can serve as a baseline approach and help mitigate concentrated outputs often arrived at by MVO. The asset mix is adjusted…

Reading 17: Options Strategies Los 17 a: Demonstrate how an asset’s returns may be replicated by using options Los 17 b: Discuss the investment objective(s), structure, payoff, risk(s), value at expiration, profit, maximum profit, maximum loss, and breakeven underlying price…

Managing emerging market currency risk presents a unique set of challenges, with two key considerations at the forefront: Higher trading costs: Many emerging market currencies have thin trading volumes. These occasions increase transaction costs due to broader bid-offer spreads. Additionally,…

In this section, we delve into portfolio management and the complexities of handling multiple exposures to foreign currencies. In such cases, managers must consider the correlation among the currencies present in the portfolio. For instance, one might assume that having…

Managers with the flexibility to make currency exposure risk decisions can deviate from fully hedged portfolios. This leads to strategic considerations on finding the optimal level of portfolio protection and its associated cost. Various strategies are employed to reduce hedging…

Forwards Vs. Futures This section addresses the simplest hedging scenario: a 100% hedge ratio for a single foreign currency exposure. Both futures and forward contracts can be utilized to achieve full currency hedges, but institutional investors typically prefer forward contracts…

When managers pursue active trading strategies, they expose themselves to risk. This risk is due to their market views, which may not always be accurate. Additionally, increased transaction costs add to the challenges they face. As a result, managers need…