Chapter 10 Flashcards
What is a currency cross hedge
Transaction in which a MF substitute its exposure to one currency risk for an exposure to another one
To qualify as a hedge the derivative must:
Reducing, offsetting another position
Negative corrolation with the value of another position
Not have an expected offset > than the change in the value of the hedged position
MF use derivative to
Protect against exchange trade risk
Equity manager use derivative
To manage Beta
Margin paid on a standard future or forward is
An account receivable
There is a greater risk with OTC derivative
As compared with a Exchanged traded one
Returns received from a derivative
Are taxed as regular income
Naked writer are
Not permitted in MF writer does not have the security they are obligated to sell
Minimum rating for OTC derivative
A
Underlying asset can be
Financial asser or commodity
The margin paid or deposited on a future or forward is
An account recevable or a current asset
The easiest way to hedge a position is to do what?
To take a position in a derivative contract with a payoff that is the opposite or offsett by the position being hedged
What is a down side of hedging a position ?
Opportunity cost
Derivatives can be uses for non-hedging purposes such as:
Write or sell a call or a put option to earn additional income (premium)
Gain exposure to a market (with options, forwards, futures)
Reduce exposure (buying an option contract to offsett one that was written)
Advantage of using derivatives in a portfolio
Reducing risk (hedging)
Ease of execution
Lower costs
Greater asset allocation
Opportunity to earn
Considered a hybrid of active and passive management
Contingent immunization and monitor value portfolio and the cost to buy a zero coupon bond strip bond
The modified duration of a bond portfolio equals (5th property)
The dollar-weighted average of the modified duration of the bonds that comprise the portfolio
The higher the yield to maturity (4th property)
The lower the bond’s modified duration
The higher the coupon rate (3rd property)
The lower the bond’s Modified duration
The longer the term to maturity (2 nd property)
The higher the bond’s modified duration
The percentage change in the price of a bond (1sr property)
Can be fond by multiplying the bond’s modified duration by the change in the bond’s YTM
