Managed Products 13/17 Flashcards
What is an advantage to an ETF of using swaps instead of futures contracts?
Swaps are much more flexible than exchange-traded derivatives. The swap maturity can be tailored to exactly what the ETF needs, especially for time horizons several years out.
Which service provider performs scenario analysis and stress testing to hedge fund managers?
Many prime brokers also provide risk measures directly to managers or large institutional investors. These measures usually go beyond those provided to investors by hedge funds or those calculated by hedge fund analysts. They tend to be forward-looking or based on scenario analysis and stress testing.
How does a leveraged ETF achieve the leveraged return effect?
Derivatives
What is required to be disclosed by every Canadian mutual fund in its simplified prospectus?
Portfolio turnover
There are two basic types of wrap products
funds of funds (FoFs) and separately managed wraps.
Separately managed wraps
Separately managed wraps (or simply wrap accounts) target investors with higher levels of investable assets.
Accounts are managed on a segregated basis, thereby enabling the client to own individual securities. Clients
can select from a range of professional money managers to manage their portfolios. Wrap accounts have higher
minimum investment requirements than other wrap products, usually starting in the $150,000 range.
Synthetic ETF
are different from other ETFs in that they do not hold the same underlying exposure as the index
they track. Synthetic ETFs are constructed with derivatives such as swaps to achieve the return effect of the index. As a result, the exposure of synthetic ETFs is notional, rather than real.
Leveraged ETF
-The challenge with these structures is that they are path dependent, which means that longer holding periods can
create differences between an expected and realized return.
-Also uses derivatives like swaps
Swaps
Leveraged ETF creation and redemption
increased demand - Cash is given by the designated broker to the ETF sponsor. The sponsor, in turn, issues ETF units to the broker and uses the cash to increase the swap position. ETF units are
issued at the day-end NAV to cover the broker’s short position.
CREATION AND REDEMPTION PROCESS OF AN INVERSE ETF
The creation and redemption process for an inverse ETF is similar to the leveraged ETF process. Cash, rather than
securities, is exchanged.
Futures-based ETFs (pricing based on distance of contracts)
In a normal market, the distant contracts are priced higher to reflect the underlying commodities’ cost of carry
Creation and redemption of commodity based ETF
Derivatives-based ETFs can use either the in-kind redemption or the cash creation process. Futures-based ETFs use
in-kind redemption because the futures contracts are based on commodities that are fungible (i.e., identical in all
markets). Over-the-counter derivatives-based ETFs use cash creation because the private contract nature of the
derivatives used does not lend itself to fungibility.
RISKS ASSOCIATED WITH THE USE OF DERIVATIVES, LEVERAGE,
OR COMMODITIES BY ETFs
-Risk of roll yield loss
* Risk of front running
* Counterparty risk in derivatives
* Risk related to volatility and leverage factors
* Risk of short selling bans
* Risk related to futures position and sizes
* Credit risk in currency ETFs
* Risk of using swaps (in comparison to exchange-traded derivatives)
Risk of roll yield loss
But what’s going on here? By having to continuously buy futures contracts that are consistently priced higher than
the spot price, the ETF is essentially locking in a small loss every time it rolls its futures position. In fact, it doesn’t
matter whether the price goes straight up or straight down or is quite volatile. As long as the market is consistently
in contango, the ETF will always underperform the spot price using the futures roll strategy.
CREDIT RISK IN CURRENCY ETFs
Currency ETFs hold either physical currency or time deposits and short-term commercial paper in the foreign
exchange concerned. In the case of actual cash, it is held as bank deposits where it is exposed to the credit risk of the
bank. These deposits of the ETFs are treated by the bank like any other deposit and subjected to the same rights and
risks. Accordingly, the deposits have limited protection under deposit insurance programs. If the bank holding the
deposits were to fail, the ETF would likely lose most of that money.
RISK RELATED TO FUTURES POSITION AND SIZES
regulatory changes, similar to those with futures
Risk of swaps vs etf futures/options
counterparty risk, costs,
tracking error (non-fungible, cash redemeption. not easily tradeable in kind because it’s a customized asset. etf futures can use in kind redemption process, are very fungible)
benefits of swaps
flexibility -
