Title Level III V5 LM02 Essay Quiz.pdf ✅

Level III Trade Strategy and Execution Essay Quiz Copyright © IFT. All rights reserved www.ift.world Page 1 TOPIC: PORTFOLIO MANAGEMENT AND WEALTH PLANNING TOTAL POINT VALUE OF THIS QUESTION SET IS 15 POINTS Saturni Capital Case Scenario Saturni Capital is a large investment company that helps individuals and institutions build wealth, earn income, preserve capital, and achieve financial goals. Dua Mali, portfolio manager at Saturni, is given a $100 million mandate to track the S&P 500 Index benchmark with a 2% tracking error. Mali discusses the performance measurement of the mandate with the client. Mali asks Pawan, Saturni’s senior trader, to finalize the best trade strategy for the mandate. Pawan is concerned that trading into positions at the close of the day will cause a significant price impact. He would like to trade into positions over multiple days. The client, however, requests that the mandate be fully invested as quickly as possible. Mali also prefers not to have the fund holding cash, given that the performance evaluation begins at the close of trading. Holding a cash position in the fund exposes Mali to underperformance (arising from cash drag) relative to the S&P 500. Pawan explains to the client the following trading strategies used by Saturni: • Short-term alpha-driven, • Long-term alpha-driven, • Risk rebalance: buy/sell basket trade, and • Cash equitization trade. He then instructs the trading desk to execute the trades for the client. Hina Shahid, Saturni’s long and short equity fund manager, is concerned about the fund’s volatility. The fund’s long and short positions are managed to offset one another, such that the fund is immunized from sudden price moves. The fund holds liquid securities. Its mandate specifies a target risk level of 15%. With the increase in volatility, the fund’s current risk level is closer to 19%. The increase is within the portfolio’s guidelines, but Shahid believes that volatility will remain at current levels for the next several months. She decides to reduce risk in a controlled and gradual manner by liquidating positions to bring the fund’s volatility back to its target risk level. Shahid asks Pawan for a suitable order execution strategy. Pawan discusses three algorithms with her: scheduled (POV, VWAP, TWAP), arrival price, and dark strategies/liquidity aggregators. Pawan evaluates the cost of the trade that was transacted earlier in the week. One thousand shares of ACM Holdings were ordered to be bought on Monday with a benchmark price of $30.00. On Monday, 500 shares were purchased at $30.05 per share. Commissions and fees of this trade were $25. On Monday, the closing price was $29.99 per share. On Tuesday, 200 more shares were purchased at $30.12 per share. Commissions and fees were $15. Shares for ACM closed on Tuesday at $30.04 per share. Pawan notes that the remaining shares are not purchased,
Level III Trade Strategy and Execution Essay Quiz Copyright © IFT. All rights reserved www.ift.world Page 2 and the order is canceled today (Wednesday), just as the market closes at $30.08 per share. A. Identify the most appropriate reference price benchmark for Mali’s trade. Justify your response. • Decision price • Opening price • VWAP • Closing price B. Select the most appropriate trading strategy to execute for the 100 million mandate. Justify your response and identify one advantage of this strategy. • Short-term alpha-driven • Long-term alpha-driven • Risk rebalance: buy/sell basket trade • Cash equitization (futures) trade
Level III Trade Strategy and Execution Essay Quiz Copyright © IFT. All rights reserved www.ift.world Page 3 C. Determine which of the three algorithms: scheduled (POV, VWAP, TWAP), arrival price, and dark aggregator is most suitable for trading this order. Justify your response. • Scheduled (POV, VWAP, TWAP) • Arrival Price • Dark Aggregator D. Calculate the implementation shortfall for ACM in basis points.