Free CFA Level III: Portfolio Management Yield Curve Strategies Practice Questions

C is correct. A ladder portfolio distributes bond holdings evenly across a range of maturities (e.g., 1-year, 2-year, 3-year, through 10-year). As each short-term bond matures, the proceeds are reinvested at the longest maturity, maintaining the ladder. This provides regular liquidity, diversification across maturities, and a natural hedge against interest rate uncertainty.
Choice A is incorrect because concentrating at the longest maturities describes a concentrated long-duration position, not a ladder.
Choice B is incorrect because concentrating at the shortest maturities describes a money market or ultra-short strategy, not a ladder.

A is correct. A negative butterfly (short wings at short and long maturities, long body at the intermediate maturity) profits when the yield curve becomes more curved (hump-shaped). This means the intermediate yield falls relative to the average of the short and long yields. As the 10-year yield declines relative to the 2-year and 30-year yields, the long body position gains value while the short wing positions have offsetting losses.
Choice B is incorrect because flattening to a straight line means reducing curvature, which would benefit a positive butterfly (long wings, short body), not a negative butterfly.
Choice C is incorrect because a duration-neutral butterfly is designed to be insensitive to parallel shifts.

B is correct. The manager has two separate curve views: EUR stays steep (or steepens further) and USD flattens. In EUR, a steepener trade (long short-duration, short long-duration) profits from the steep curve. In USD, a flattener trade (long long-duration, short short-duration) profits from curve flattening. These are independent yield curve views implemented in their respective currency markets.
Choice A is incorrect because this takes a directional view on rates and currency rather than expressing specific yield curve shape views.
Choice C is incorrect because the views for each currency differ (steepening in EUR vs. flattening in USD), so implementing identical positions in both currencies would be inconsistent with the forecasts.