Section 3 - Fixed Income

Question 1

Types of Liabilities

Answer 1

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

Question 2

ZCB Immunization Advantages

Answer 2

NO reinvestment risk
NO price risk (Held to Maturity)

Question 3

Immunization For 1 Liability (How To Implement)

Answer 3

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

Question 4

Zero Coupon Bond Portfolio (characteristics)

Answer 4

1. No Price Risk
2. No Reinvestment Risk
3. No Variace of RoR

Question 5

Bullet Porfolio

Answer 5

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

Question 6

Barbell Porfolio

Answer 6

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

Question 7

Immunized Convexity Porfolio (Formula)

Answer 7

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

Question 8

Duration Matching Multiple Liabilities (How To)

Answer 8

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

Question 9

Laddered Portfolio (Advantage)

Answer 9

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

Question 10

Convexity Differences per Porfolio Strategy GIVEN

1. Same Duration
2. Same CF Yield

Answer 10

1. Barbell: (++) Convexity
2. Laddered: (+) Convexity
3. Bullet (=) Convexity

Question 11

BPV Formula

Answer 11

BPV Formula = MVa * ModDur * 0.0001

Question 12

Immunization w/ Derivatives Overlay

Answer 12

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

Question 13

Nf (Fórmula)

Answer 13

Nf = (BPVliability - BPV asset) / BPVFutures

BPV Future = BPV CTD / Conversion Factor

Question 14

Contingent Immunization (Concept)

Answer 14

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

Question 15

Interest Rate Swaps Immunization (Condition Formula)

Answer 15

BPVa + BPVswap/100par = BPV liability

Question 16

Receiver Swaption

Answer 16

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

Question 17

Payer Swaption

Answer 17

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

Question 18

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

Answer 18

High Confidence: SWAP (afunda direto)

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

Medium Confidence: Collar (combinação de ambos)

Question 19

When to do NOTHING if ↑i increases

Answer 19

If BPV asset < BPV liabilities

Because Prices will Drop ↓

Question 20

When to do NOTHING if ↓i drops

Answer 20

If BPV asset > BPV liabilities

Because Prices will Increase ↑

Question 21

What to do with DURATION if ↑i increases

Answer 21

Sell Duration in Assets

Question 22

What to do with DURATION if ↓i increases

Answer 22

Buy Duration in Assets

Question 23

Strategy for 100% Hedge (Condition Formula)

Answer 23

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

Question 24

Put and Call Option (Duration Signal)

Answer 24

Call Option = (+) Duration

Put Option = (-) Duration

Question 25

Liability-Driven Risks

Answer 25

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

Question 26

Portfolio Dispersion (Rationale)

Answer 26

(+) Disperse = (+) Convexity