NO.PZ202209060200004506
Stone fields a call from Edisto Palma, an MPA portfolio manager in the Madrid office. Palma is frustrated with the negative interest rate environment present in the European Union (EU) debt markets resulting from the European Central Bank’s quantitative easing programs. He tells Stone he is considering buying securities outside of the EU market to pick up additional yield. Stone informs Palma that he is sympathetic with the situation but that there are implications to buying securities outside his EU benchmark, whether they are from developed or emerging markets. Stone outlines three suggestions for Palma. First, he should evaluate whether the spread advantage is negated by the cost of a currency hedge. Second, he should avoid local currency investments in countries where the exchange rate is pegged. Third, he should ensure that the timing of the credit cycles across markets coincides.
Which of the suggestions Stone outlines for Palma in selecting the proposed investments is most likely correct? The one regarding:
- local currency investment is most likely correct.
- spread advantage is most likely correct.
- the credit cycle is most likely correct.
Solution
B is correct. Investments in securities denominated in a foreign currency can often produce higher yields than domestic investments produce, particularly in emerging market countries. However, if the portfolio manager chooses to hedge the foreign exchange (FX) exposure, the cost of hedging can offset a significant amount of the yield advantage, thus reducing the relative value advantage. This may not be the case for currencies that are pegged because the portfolio manager may choose not to hedge the FX because the foreign currency will most likely be more stable, assuming there is no devaluation.
A is incorrect because investments in countries where the currency is pegged may not require FX hedging, given more stability in the exchange rate.
C is incorrect because credit cycles may vary across regions and this can be used to the advantage of the portfolio manager to diversify.
老师，关于pegged currency我们不是一直强调会有更大风险出现crisis吗? 这里为什么不需要考虑呢?
我没有选这个答案因为我理解是这句话说的太绝对说完全avoid投资固定汇率制的国家, 这个理解方式对不对呢？
谢谢
