R19: LDI & Index-based Flashcards
What’s the duration gap and what happens if the investment horizon is more than the duration and viceversa?
McD - Investment horizon.
If IH > D, negative, reinvestment risk (good if i/r increase).
If D > IH, positive, price risk (good if i/r fall).
What’s the rebalancing ratio?
Old $D/New $D
Single liability immunisation characteristics?
McD of assets = McD of liabilities
PV of assets => PV of liabilities
Minimise convexity (to keep structural risk low)
Monitor and rebalance
Multiple liabilities immunisation (duration matching) characteristics?
Modified D of assets = Modified D of liabilities
PV of assets => PV of liabilities
Convexity of assets slightly more than convexity of liabilities
Monitor and rebalance
Cash flow matching vs immunisation?
CF is more expensive but no rebalancing and monitoring, less assets available, simpler.
What’s accounting defeasance?
Remove A & L from BS
What’s horizon matching?
Near-term liabilities cash flow matched
Long-term liabilities duration matched
What are other types of risk to FI PM?
Embedded options (uncertainty of timing and value of CFs) Model risk (wrong assumption or model) Spread risk Counterparty risk (default OTC) Collateral exhaustion risk Liquidity risk
What are the primary indexing risk factors?
Duration Key rate duration Sector and quality % Sector duration contribution Quality spread duration contribution Sector/coupon/maturity weights Issuer exposure
What are the types of enhanced indexing?
Lower cost enhancements
Issuer selection enhancements (got vs corp)
Yield curve enhancements (ST vs LT)
Sector and quality enhancements (AAA vs AA)
Call exposure enhancements (callable vs vanilla)
ESG
What are the problems with bond indexes?
Lack of liquidity Heterogeneity More frequent reconstruction/turnover Bums problem Difficult to match desired risk
