Overview Flashcards
investment mandate
+ a set of rules laying out how a pool of assets should be invested
+ include guidelines on priorities, goals, benchmarks, risk, and types of funds to be either chosen or avoided
+ Mutual funds, exchange-traded funds, and other pooled assets always have investment mandates
Liability - based mandate
managed to match or cover expected liability payments (future cash outflows) with future projected cash inflows
immunization
+ is process
+ structuring and managing FI Bond portfolio
+ minimize the variance in the realized rate of return over the known time horizon
cash flow matching
+ is an immunization approach
+ ensure all future liability payouts are matched precisely by cash flows from bonds or FI derivatives
Duration matching
+ an immunization approach
+ Based on duration of assets and liabilities
+ the liabilities being matched (the liability portfolio) and the portfolio of assets (the bond portfolio) should be affected similarly by a change in interest rates
+ effectively in parallel shift
contingent immunization
+ fund manager switches to a defensive strategy if the portfolio return drops below a predetermined point
+ fund manager uses an active management approach to individually select securities in hopes of outperforming a benchmark
pure indexing
replicate a bond index as closely as possible and is sometimes referred to as “full replication.”
active return
tracking difference
active risk
benchmark tracking risk or tracking error
enhanced indexing approach
maintains a close link to the benchmark but seeks to generate some outperformance relative to the benchmark
Active management
allows larger risk factor mismatches relative to a benchmark index. These mismatches may cause significant return differences between the active
portfolio and the underlying benchmark
Macaulay Duration
weighter average of time to receive bond’s full payment
Modified Duration
= Macaulay Duration / (1+r/n)
Effective Duration
Delta Price/ Delta Yield curve
key rate Duration / Partial Duration
Delta price / Delta yield curve at a specific point / segment
empirical duration
interest rate sensitivity determine from market data
money duration / Dollar duration
price change in units of currency
PVBP
Price value a basis point: change in bond price in a 1bp change in yield
convexity
a second order of price change to yield change
Effective convexity
like convexity but delta yield replace by Delta curve
Bond portfolio duration
sensitivity of Bond portfolio change to change in interest rates
Mod Du of bond portfolio
percentage change in MV to change in YTM
convexity of a bond portfolio
second order effect of change in yield curve
relative value
the technique to rank bond
total return receiver
related to TRS, the party receive both CF from underlying index and the appreciation in the index
total return payer
responsible for paying the reference obligation CF & return to the receiver
method for leveraging FI portfolio
+ future contracts
+ Swap agreement
+ reperchase agreement
+ Security lending
total return swap (TRS)
+ an OTC derivative,
+ allows an institutional investor to transform an asset or liability from one asset category to another—
for instance, from variable-rate cash flows referencing the market reference rate to the total return on a particular bond index
strategy for manage taxable account:
(1) realize capital gain to offset loss
(2) Extend holding period to realize long term
(3) Consider differentials in income vs gain tax rate when selecting investment -> trade off
flight to quality
buying safer assets, such as government bonds (increasing their prices), and selling riskier assets
3 types of total return mandage
(1) pure indexing: active risk, active return = 0. In pratice, active risk = 0, active return <0 because of fee, cost
(2) enhanced indexing approach: minor investment risk factor mismatch
(3) active management: allow risk factor mismatch -> large active return
It is not similar to equity include 6 approachs:
(1) pure indexing
(2) Closet indexing
(3) Factor neutral and diversified stock picking
(4) Diversified factor bets
(5) Concentrated factor bets
(6) concentrated stock picks
3 Strategies to use when managing taxable accounts
(1) Realize capital losses to offset gains
(2) Extend holding periods to realize long-term, rather than short-term, capital gains.
(3) Consider differentials in income versus gain tax rates when selecting investments.
portfolio dispersion
the variance of the times to receipt of cash flows
with respect to the duration.
+ bản chất Port. Dispersion khác so với convexity
+ đo lường biến động của Asset Mac Dur so với Liab Mac Dur
Duration times spread
+ This measure give a higher sensitivity when spread themselves are higher
+ Reflect that HY junk bond with higher spreads -> expected higher spread changes
local richness/cheap ness
Biết thêm về khái niệm Local richness/Local cheapness: phát sinh do đường yield curve đa phần chúng ta xây trên lý thuyết v/v dựa trên những điểm yield có thể khảo sát được. Thực tế khi phát sinh, Yield có thể cao hơn/thấp hơn yield curve đã xây
Pass-through
Pass-through: relate to can not delay tax. Đối với interest income -> must pass through. Đối với capital gain sẽ có trường hợp pass-through (phải đánh thuế luôn) hoặc not pass-through (có thể delay cho đến khi realize return mới bị đánh thuế)
repo and reverse repo
repo đứng trên góc độ borrower, còn reverse repo đứng trên gốc độ của lender
Bilaterals & Triparties
Bilaterals liên quan đến 2 parties làm việc trực tiếp với nhau. Còn triparties liên quan đến bên thứ 3 (thường là Bank) có vai trò quản lý TSBĐ
Bilaterals & Triparties
Bilaterals liên quan đến 2 parties làm việc trực tiếp với nhau. Còn triparties liên quan đến bên thứ 3 (thường là Bank) có vai trò quản lý TSBĐ
cash driven & securities driven
đề cập đến động lực của repo. Với cash driven, general collaterals là OK. Đối với securities driven, cần có specific collaterals
Holding period vs Maccaulay Duration đối với price risk và reinvestment risk
nếu Holding period > Maccaulay Duration -> Price risk lớn hơn
Pros & Cons của phương pháp Aggregate/ Average khi tính Duration, convexity của Portfolio
Có 2 cách để tính được DUration và Convexity của Portfolio. (1) là aggregate và (2) là average các tài sản có trong danh mục. Trong đó (1) là chuẩn nhất, còn (2) thì trong 1 số trường hợp bị overestimate.
