hether your portfolio provides an arbitrage opportunity and, if it does, how will you maximise arbitrage profit?说明你的投资组合是否提供套利机会，如果提供，你将如何最大化套利利润？
This is an observational question requiring a bit of tenacity and investment nous to establish and interpret Technical Analysis.
The best way to approach this question is to look at the share price of your chosen companies for the last year. Next, identify two, possibly three date points when share price went down sharply for these companies. Then, compare the date points across your portfolio of companies to determine any trend.
For instance, share price for Renault dropped sharply on 24th May, 2nd August and 11th December 2014; AstraZeneca’s share price dropped sharply on 15th May, 31th July and 11th December 2014. You can observe a trend here, i.e., share prices of Renault (France) and AstraZeneca (UK) drop around similar dates, which means there is strong correlation between the markets (French and UK) as well as the two companies.
To create an arbitrage opportunity, you will have to set your “profit ceiling”. To achieve this arbitrary profit ceiling, you will start buying more shares in Renault and AstraZeneca. This will increase the demand for Renault and AstraZeneca’s shares, thereby, increasing their share price. Once the share prices hit your target prices, you will start selling these shares. This will increase your investment return and maximise your arbitrage profit, thereby, achieving your profit ceiling.
For the above to hold true, you will need to follow a few assumptions:
- Interest rates remain the same
- Market expectations are predicted and constant
- Inflation rate remains constant
- Market volatility is incremental and not subjected to exogenous shocks
- Share price comparison is an observational metric for correlation
4. What is the impact of exchange rate volatility and market risk on your chosen portfolio?汇率波动和市场风险对您选择的投资组合有何影响？
To answer this question, you will compare the spot and forward exchange rates for your 4 chosen markets and the Beta for the 4 chosen markets. Given the volatility and movement in spot and forward exchange rates, you will discuss the impact of translation exposure, transaction exposure and economic exposure on your hedge fund exposure.
This question is more qualitative in nature, and will therefore, require a scholarly appraisal of exchange rate and market risk. In particular, you will need to explain the different types of exchange rate risks/exposures and their reciprocal impact on your portfolio.
When explaining market risk, you will define the nature of market risk and how market volatility can impact the profitability of your portfolio.
5. How can you use Fama-French 2-factor and 3-factor models to hedge against exchange rate and market risk?
This may seem like a complicated question, but the underpinnings are fairly straightforward.你如何使用法玛-法国2因子和3因子模型对冲汇率和市场风险？
The two factor model follows the following equation:
Ri = E(Ri) + βi1F1 + βi2F2 + ei
Where, βi1F1 = Exchange Rate Risk Factor and βi2F2 = Market Risk Factor.
To calculate the return, you will need the expected return of your portfolio (all 20 equities). The return will give you the indication of the positive or negative impact of exchange rate and market risk. If your return is hi
