Pension ALM Reading 16 question 6 CFAI text

[jayman_137]

volume 2 reading 16 page 535 question 6…
Why are we using derivatives to hedge the market-related pension risk in this case (choice A) and not nominal and real rate bonds (choice B)
-thanks for any insight

 

[janakisri]

“market-related” means stock-market related , so derivatives ( typically equity futures ) are a natural hedge because they will track the market closely.
nominal or real bonds cannot track the stock market ( at least not well enough)

 

[jayman_137]

A manager would need to invest in nominal and real bonds to mimick some of the pension plan’s exposure. You are suggesting that these would reamin in place but that they would also rely on derivatives to hedge the equity portion?

 

[jayman_137]

ok I think I understand now after reading page 531 of the text… Use derivatives in place of completely using nominal and real bonds as it is cheaper, freeing up more $ for return generation. Measure risk and exposure in nominal and real bond terms but realy (at least in portion) on derivatives to give you some of this exposure low cost.