CFA Institute CFA-Level-II Dumps - Pass CFA Level II Chartered Financial Analyst Exam in 2026

Martin Hagemann, CFA, works for a large brokerage firm in Frankfurt, Germany. Hagemann has been hired by Tryssen AG, a global research-based company that is preparing to go public after a long history of operating privately. The need to raise substantial amounts of capital to fund research and development activities is seen as the key motivation for the change in policy. Tryssen is engaged in the discovery, development, manufacture, marketing, and sale of medical products.

Hagemann's first task is to recommend an exchange upon which Tryssen stock can be traded. One possibility is the Deutsche Bourse. The Deutsche Bourse operates primarily as a continuous order-driven system. Another alternative that Tryssen is considering is to list on a different exchange that operates as a price-driven system.

As an alternative, Tryssen may choose to list as an American Depository Receipt (ADR). ADRs are negotiable U .S . securities that usually represent a non-U .S . based company's publicly traded equity. Although typically denominated in U .S . dollars, depository receipts can also be denominated in euros. Depository receipts can be eligible to trade on all U .S . stock exchanges as well as on many European stock exchanges.

The increasing demand for depository receipts is driven by the desire of individual and institutional investors to diversify their portfolios, reduce risk and invest internationally in the most efficient manner possible. While most investors recognize the benefits of global diversification, there are many challenges presented when investing directly in local trading markets. Obstacles can include inefficient trade settlements, uncertain custody services, and costly currency conversions. Depository receipts overcome many of the inherent operational and custodial hurdles inherent in international investing. Tryssen has decided to access the U .S . market by involving itself in an ADR program. Tryssen has decided to save itself a lot of trouble, however, by not complying with SEC registration and reporting requirements.

As an alternative to ADRs, investors interested in increasing their exposure to international investments can choose to acquire exchange traded funds (ETFs). Hagemann researches the advantages and disadvantages of ETFs.

Execution costs are always a concern, and perhaps even more so for international investors. At the present time, Tryssen AG is most concerned with how reliably it can estimate trading costs. As part of the cost estimation process, Hagemann is asked to provide a report on the advantages and disadvantages of techniques used to reduce execution costs.

Trysse AG proceeds to list on the Frankfurt exchange, and a U .S . affiliate of Hagemann's company starts to aggressively promote the stock. A U .S . investor buys 200 shares of Tryssen at a price of 20 per share. At time of purchase, the exchange rate is 1 = $1.15. One month later Tryssen pays a dividend of 0.25 per share, and investors are subject to a withholding tax of 20%. The U .S . investor is eligible to claim a tax credit of $0.06 per share. At the time the dividend was paid, the shares had jumped to 24 each and the U .S . dollar had weakened to 1 = $ 1.20. The shares were sold just after the dividend was paid.

Which of the following best describes a comparative advantage of a price-driven system over an order-driven system?

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Ron Natin heads a committee that oversees the USA Insurance portfolio with total assets of $25 billion. The portfolio has 15% of total assets allocated to foreign investments, which include both international stocks and bonds. The committee has adopted a position that the domestic markets are efficient and thus, has indexed the domestic portion of the portfolio. Each unique asset class in the domestic portfolio has been benchmarked individually. The committee believes that foreign markets are less efficient and utilizes active managers for this asset class. The foreign allocation is 60% stocks and 40% bonds. The committee has divided the foreign stock portfolio equally among three different managers. The committee closely monitors the risk level of these managers by reviewing their portfolio betas (current betas: 1.1, 0.95, and 1.3).

As part of his committee responsibilities, Natin is required to review all reports and speeches prepared by other members of the committee before they are presented to the public. One of the committee members, Mclanie Henley, has submitted a speech on the subject of international diversification and the international capital asset pricing model (ICAPM) that she will give to a group of MBA students at a local university. Following are excerpts from her proposed speech:

International investment and diversification is an important concern in money management and, of the many relevant issues to discuss, there are two key insights that I will Take time to explain. First of all, it is essential to realize that the currency exposure of a foreign stock investment is the sensitivity of the stock price to a change in the value of the local currency and that a positive correlation between stock prices and the local currency would mean that the local stock price increases as a result of a depreciation of the local currency. Second, as future asset managers you should realize that improvements in a foreign nation's economic activity that result in an increase in real interest rates will decrease bond prices, but will be offset by an appreciation of the home currency.

The ICAPM is similar to the domestic CAPM in several ways. For example, both models assume that investors are risk-averse, preferring lower levels of risk and greater expected returns, that all investors have the same expectations for the risk and return of every asset, and that all investors should hold some combination of a risk-free asset and the market portfolio.

The IGAPM is a useful construct to determine asset prices in a global context. Strategies that depend explicitly on asset prices derived from the ICAPM can rely on these asset prices even if currency hedging is inhibited in certain markets by legal restrictions on such activities.

Evaluate Henley's statements in her proposed speech comparing the domestic CAPM to the ICAPM and her statement regarding the hedging restrictions and the ICAPM.

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Paul Durham, CFA, is a senior manager in the structured bond department within Newton Capital Partners (NCP), an investment banking firm located in the United States. Durham has just returned from an international marketing campaign for NCP's latest structured note offering, a series of equity linked fixed-income securities or ELFS. The bonds will offer a 4.5% coupon paid annually along with the annual return on the S&P 500 Index and will have a maturity of five years. The total face value of the ELFS series is expected to be $200 million.

Susan Jacobs, a fixed-income portfolio manager and principal with Smith & Associates, has decided to include $10 million worth of ELFS in her fixed-income portfolio. At the end of the first year, however, the S&P 500 Index value is 1,054, significantly lower than the initial value of 1,112 set by NCP at the time of the ELFS offering. Jacobs is concerned that the four remaining years of the ELFS life could have similar results and is considering her alternatives to offset the equity exposure of the ELFS position without selling the bonds, Jacobs decides to offset her portfolio's exposure to the ELFS by entering into an equity swap contract. The LIBOR term structure is shown below in Exhibit 1.

After hearing of her plan, one of the other partners with Smith & Associates, Jonathan Widby, feels it is necessary to meet with Jacobs regarding her proposed strategy. Mr. Widby makes the following comments during the meeting:

"You should also know that I am quite bullish on the stock market for the near future. Therefore, as an alternative strategy, I recommend that you establish a long position in a 1 x 3 payer swaption. This strategy would allow you to wait and see how the market performs next year but will give you the ability to enter into a 2-year swap with terms that can be established today should the market have another down year.

If, however, you choose to proceed with your strategy, know that credit risk for an equity swap is greatest toward the end of the swap's life. Thus, analysts tracking your portfolio will not be happy with the added credit risk (hat your portfolio will be exposed to as the swap nears the end of its tenor. You should think about what credit derivatives you can use to manage this risk when the time comes."

To offset any credit risk associated with the equity swap, Widby recommends using an index trade strategy by entering into a credit default swap (CDS) as a protection buyer. Widby's strategy would involve purchasing credit protection on an index comprising largely the same issuers (companies) included in the equity index underlying the swap. Widby suggests the CDS should have a maturity equal to that of the swap to provide maximum credit protection.

Evaluate, in light of the appropriate equity swap strategy for Jacobs's portfolio, Mr. Widby's comments regarding the credit risk and use of swaptions in Jacobs's portfolio.

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Jonathan Adams, CFA, is doing some scenario analysis on forward contracts. The process involves pricing the forward contracts and then estimating their values based on likely scenarios provided by the firm's forecasting and strategy departments. The forward contracts with which Adams is most concerned are those on fixed income securities, interest rates, and currencies.

The first contract he needs to price is a 270-day forward on a $1 million Treasury bond with ten years remaining to maturity. The bond has a 5% coupon rate, has just made a coupon payment, and will make its next two coupon payments in 182 days and in 365 days. It is currently selling for 98.25. The effective annual risk-free rate is 4%. Adams is also analyzing forward rate agreements (FRAs).

The LIBOR spot curve is as follows:

The LIBOR spot curve is as follows:

Finally, Adams wants to price and value a currency forward on euros. The euro spot rate is $1.1854. The dollar risk-free rate is 3%, and the euro risk-free rate is 4%.

If the Treasury bond price decreases to 98.11 (including accrued interest) over the next 60 days, the value of a short position in the 270-day forward contract contract on a $10 million bond is closest to:

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Stanley Bostwick, CFA, is a business services industry analyst with Mortonworld Financial. Currently, his attention is focused on the 2008 financial statements of Global Oilfield Supply, particularly the footnote disclosures related to the company's employee benefit plans. Bostwick would like to adjust the financial statements to reflect the actual economic status of the pension plans and analyze the effect on the reported results of changes in assumptions the company used to estimate the projected benefit obligation (PBO) and net pension cost. But first, Bostwick must familiarize himself with the differences in the accounting for defined contribution and defined benefit pension plans.

Global Oilfield's financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Excerpts from the company's annual report are shown in the following exhibits.

If Global Oilfield's retirement plan is a defined contribution arrangement, which of the following statements would be the most correct?

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