Question

QUESTION 1

Suppose that you want to hedge your long position in Colombian hard currency debt buy buying 5-year Credit Default Swap (CDS) protection. The notional amount you want to hedge is US$50 million and the CDS trades at 200 bps. How much will be your quarterly payment to the seller of CDS?

Formula: Quarterly Premium = Notional x Swap Rate (in decimal) x (92/360)

	A.	US$1 million
	B.	US$55,555.37
	C.	US$255,555.56
	D.	US$246,575.34
	E.	US$250,000

QUESTION 2

The sudden stop caused by the coronavirus shock has led to a high degree of risk aversion; the reversal of capital flows (outflows) from Latin America; cessation of external financing to LatAm; a drop in commodity prices; and a likely deep and long recession in the region. In addition, fiscal deficits will widen and gross external debt to GDP ratios will increase as tax revenue plunge and countercyclical fiscal measures will increase fiscal spending. Please mark the only FALSE statement regarding sovereign and corporate hard currency debt.

	A.	It is highly likely that rating agencies will downgrade several Latin American sovereign ratings, with some countries becoming sub-investment grade
	B.	Countries entering the crisis with high external debt service payments and financing requirements and extremely weak fiscal and external fundamentals may default on their external debt
	C.	It is highly likely that investors will see an increase in the number of LatAm countries requesting an adjustment and financing program from the IMF
	D.	In this scenario, investors should go long as many quasi-sovereign LatAm bonds because they pay higher spreads than the sovereign
	E.	A possible trading strategy for dedicated LatAm bond investors is to go long a basket of sovereigns with the strongest credit ratings hedged by selling short a basket of the weakest-rated sovereigns.

QUESTION 3

When selecting the sovereigns and bonds for your dedicated Latin American high return bond fund you will seek mid-grade or low-grade bonds that are cheap relative to fundamentals and that offer high carry

True

False

QUESTION 4

MSCI Latin America is the key benchmark index used by both active and passive portfolio managers investing in Equities in Latin America

True

False

Answer 1

1. (C) US$255,555.56

Quarterly Premium = Notional x Swap Rate (in decimal) x (92/360)

= US$50 Million * 2% * (92/360)

= US$2.55 Million

2. (D) In this scenario, investors should go long as many quasi-sovereign LatAm bonds because they pay higher spreads than the sovereign

3. False

4. True : The MSCI Latin America Index consider large-cap and mid cap representation across 6 Emerging Markets (EM) countries in Latin America. Therefore it is key benchmark index used by both active and passive portfolio managers investing in Equities in Latin America. Also with 112 constituents, the index covers 85% of the free float-adjusted market capitalization (i.e. Non Restiction) in each country.