Asset Management Flashcards
CAPM
Expected return on an asset based only on the assets systematic risk of beta
Used to determine the required rate of return on an asset based on the assets systematic risks beta
Well diversified portfolios have a beta equal to one for a single risk favor and betas equal to 0 on the others
Fama French model
Specifies following two factors
SMB (small minus big )- firm size factor
HML (High minus low) - book to market factor
Derivatives
A security with a price that is dependent upon or derived from one or more underlying assets
Possible underlying : stocks, bonds, currencies, interest rates
Forwards: agreement to sell something at a future date
Futures : agreement to sell something at a future date at price decided in the present
Swaps: enable their participants to exchange their streams of cash flows
Life settlement swaps : life insurance
Bond
Debt investment - an investor loans money to an entity which borrows funds for a defined period of time at a variable or fixed interest rate
Used to raise money and finance projects or activities corporate bonds and government bonds
Hedging
Interest rate swap :
Agreement to exchange interest rate cash flows, calculated on a NOTIONAL PRINCIPLE
interest swap can be used to hedge interest risk
Plain vanilla - one party pays a fixed rate, the other pays a floating rate
Trade date - date when parties agree on contract
Effective date- date when parties begin calculating accrued obligations eg fixed and floating payment obligations on a int swap
Termination date - date when obligations no longer accrue and final payment occurs (maturity date )
Term of transaction - lasts from effective date to termination date
Settlement date - date when payments are made
Credit default swap
Form of insurance
Allows lenders to insure themselves against changes in borrowers credit ratings
Purchaser - Mamés payments
Seller- agrees to pay the buyer if an underlying loan or security defaults
Transfer of risk from purchaser to seller
