Section 3 - Fixed Income Flashcards

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1
Q

Types of Liabilities

A

AMOUNT / TIMING (AT)
Type 1: KK
Type 2: KU
TYPE 3: UK
TYPE 4: UU

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2
Q

ZCB Immunization Advantages

A

NO reinvestment risk
NO price risk (Held to Maturity)

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3
Q

Immunization For 1 Liability (How To Implement)

A
  1. MacDur Asset = Inv Horizon Liability
  2. Initial PV CF ≥ PV Liability
  3. Portfolio Convexity ≥ Convexity Liabilities BUT minimized after it

Extra: ZCB is really good

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4
Q

Zero Coupon Bond Portfolio (characteristics)

A
  1. No Price Risk
  2. No Reinvestment Risk
  3. No Variace of RoR
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5
Q

Bullet Porfolio

A
  1. CFs concentrated @ horizon of investment
  2. Low Variance of RoR
  3. Small risk of reinvestment because there may be a longer bond after maturity
  4. BETTER for STEEPENING Curve
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6
Q

Barbell Porfolio

A
  1. CFs are dispersed
  2. More convexity
  3. More variance of RoR
  4. BETTER for FLATTENING Curve
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7
Q

Immunized Convexity Porfolio (Formula)

A

Immunized Convexity Porfolio = [MacDur² + MacDur + Dispersion)] / (1 + CFYield per period)²

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8
Q

Duration Matching Multiple Liabilities (How To)

A
  1. MVasset ≥ MVliability
  2. DDa = DDpassivo OU BPVa = BPVpassivo
  3. Dispersão Ativo > Dispersão Passivo (convexity) BUT minimized after it to reduce structural risk
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9
Q

Laddered Portfolio (Advantage)

A

Good to manage liquidity risk since there is always a bond maturing

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10
Q

Convexity Differences per Porfolio Strategy GIVEN

  1. Same Duration
  2. Same CF Yield
A
  1. Barbell: (++) Convexity
  2. Laddered: (+) Convexity
  3. Bullet (=) Convexity
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11
Q

BPV Formula

A

BPV Formula = MVa * ModDur * 0.0001

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12
Q

Immunization w/ Derivatives Overlay

A
  1. BPV a = BPVliability
  2. If BPV a > BPV liab, sell duration

Buy Futures = Buy Duration
Sell Futures = Sell Duration

Nf = (BPVliability - BPV asset) / BPVFutures

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13
Q

Nf (Fórmula)

A

Nf = (BPVliability - BPV asset) / BPVFutures

BPV Future = BPV CTD / Conversion Factor

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14
Q

Contingent Immunization (Concept)

A

If MVa > MVpassivo by a considerable amount, one may pursue active strategy to earn better returns

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15
Q

Interest Rate Swaps Immunization (Condition Formula)

A

BPVa + BPVswap/100par = BPV liability

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16
Q

Receiver Swaption

A

Asset: Fixed
Liability: Float
Dur = (+)
Buy: LONG Duration
Sell: SHORT Duration

17
Q

Payer Swaption

A

Asset: Float
Liability: Fixed
Dur = (-)
Buy: SHORT Duration
Sell: LONG Duration

18
Q

Level of Certainty of Interest Rates Movements and Which Strategy to Use

A

High Confidence: SWAP (afunda direto)

Low Confidence: SWAPTION (if i > ou < strike)

Medium Confidence: Collar (combinação de ambos)

19
Q

When to do NOTHING if ↑i increases

A

If BPV asset < BPV liabilities

Because Prices will Drop ↓

20
Q

When to do NOTHING if ↓i drops

A

If BPV asset > BPV liabilities

Because Prices will Increase ↑

21
Q

What to do with DURATION if ↑i increases

A

Sell Duration in Assets

22
Q

What to do with DURATION if ↓i increases

A

Buy Duration in Assets

23
Q

Strategy for 100% Hedge (Condition Formula)

A

[(BPVa*ΔYTMa)+(BPVh+ΔYTMh)] ~ [(BPVliab * ΔYTMliab)]

24
Q

Put and Call Option (Duration Signal)

A

Call Option = (+) Duration

Put Option = (-) Duration

25
Q

Liability-Driven Risks

A
  1. Model Risk: Assumptions
  2. Measurement Error = Approximations, Weighted Avgs for Portfolio Measuring instead of BPV (even for Type 1 Liabilities)
  3. Spread Risk = Assets are hedged w/ TSY (more vol) and Liabilities are Corp Bonds (less vol) If spread between both changes, there is a risk.
  4. Counterparty Risk = when OTC derivatives are used. Includes collateral exhaustion risk.
  5. Assumption that ΔYTMa = ΔYTMliab in interest rate movements
26
Q

Portfolio Dispersion (Rationale)

A

(+) Disperse = (+) Convexity