No.PZ2022051904000006 (问答题)
来源: 原版书
In its quarterly policy and performance review, the investment team for the Peralandra University endowment identified a tactical allocation opportunity in international developed equities. The team also decided to implement a passive 1% overweight ($5 million notional value) position in the asset class. Implementation will occur by either using an MISC EAFE Index ETF in the cash market or the equivalent futures contract in the derivatives market.
The team determined that the unlevered cost of implementation is 27 basis points in the cash market (ETF) and 32 bps in the derivatives market (futures). This modest cost differential prompted a comparison of costs on a levered basis to preserve liquidity for upcoming capital commitments in the fund’s alternative investment asset classes. For the related analysis, the team’s assumptions are as follows:
- Investment policy compliant at 3 times leverage
- Investment horizon of one year
- 3-month Libor of 1.8%
- ETF borrowing cost of 3-month Libor plus 35 bps
Q. Recommend the most cost-effective strategy. Justify your response with calculations of the total levered cost of each implementation option.
