Volume 2 Flashcards
What is the equation for PC parity and is a synthetic long forward position?
Synthetic long position example
Describe a synthetic short position?rd
Example short forward
What is a covered call and what are the greeks? How does yield enhancement occur with a covered call?
Covered call example, how does yield enhancement and reducing a position occur
How can covered call be used to position exit at target price?
What is a protective put and it use?
What happens to the delta of puts and calls as the underlying changes? What are limits of delta for puts and calls?
What are the deltas for covered calls, protective puts and short forward position?
What is a bull spread and what is the profit?
Payoff diagram for a bull spread?
What is a bear spread and its payoff?
What is a straddle, when is it used and what is the payoff?
What is a collar?
Example of a collar, when are they usually used?
Explain how delta and gamma change for a collar as stock price changes?
What is a calendar spread, what does it mean to be long/short calendar spread?
Example of calendar spreads and what are the risks associated with them?
Difference between historical and implied volatility?
What are volatility smiles and skews and each usually are driven by?
Positive or Forward Skew: If the skew is positive, it means that OTM call options have a higher implied volatility than OTM put options. This is often seen in commodities markets where a sudden demand spike can lead to significant price increases. A positive skew suggests that the market is expecting an upward price movement.
Negative or Reverse Skew: If the skew is negative, it means that OTM put options have a higher implied volatility than OTM call options. This is often seen in equity markets where investors are more concerned about price drops and hence are willing to pay more for put options to protect their investments. A negative skew suggests that the market is expecting a downward price movement.
Smile: If the implied volatility is higher for both OTM call and put options compared to ATM options, it creates a “smile” shape. This is often seen in markets with high uncertainty or expected large price movements in either direction.
What does increase in level of skew and IV signal?
What is delta hedged risk reversal? What is the term structure of volatility?
What is the trading strategy for if IV is expected to increase, decrease, stay same combined with your investment view
Describe the basic fixed for floating swap and the equation for swap rate
How can swaps be used to manage/adjust duration?
What is the equation for notional value of swap?
Swap rates are based on interbank rates while assets are based on govt/corporate rates so they are not perfect substitutes. Thus you have basis or spread risk.
What are the standard features of futures, what are interest rate forward and futures?
Locking in to pay an interest rate in the future if you’re long. They are advanced settled, determine future payoff and discount back.
What are fixed income futures?
What happens if you are the short position?
Equation for CTD?
What is the hedge ratio/notional future value?
Underlying is a bond, usually generic govt bond.
Fixed income futures example
What are currency swaps and what occurs during them?
What happens in a cross-currency basis swap?
Swaps are done at spot rates at each date.
Both parties pay not a netted out value.
The basis represents the demand for USD, if negative then demand for USD is greater and so the foreign party will recieve a lower rate, vice versa for if demand is low
Summary of cross currency basis swap example, and benefit of US investor when USD in demand?
What is a currency forward/future, example of one. What is the equation for forward price currency forward/future?
Tip: If starting with Euro wanting to end in USD you divide reverse multiply by the forward rate. Down/Divide
What is an equity swap?
Difference between total return and price return swaps?
Typically OTC but collateralised
How to use equity swap to reduce the risk of a concentrated equity position?
For equity forwards/futures what is the underlying typically and settlement, what if on single stock?
Equation for how many contracts to buy?
q is multiplier
Example for removing market risk?
Example of changing the beta of the portfolio, what is the equation for N contracts?
Can’t have have .44 of a futures contract
Demonstrate cash equitization?
Eg cash building up from dividends and want to earn the market return, how may contracts would you need
What volatility futures/forwards?
What can long volatility be a hedge against?
What i the CBOE VIX index?
vol = SD
Describe term structure of volatility futures, what is contango and backwardation and what do each mean for volatility?
What is the roll return for each?
When is roll more significant for each?
What is a variance swap?
What is the long and short position in a variance swap?
What is the settlement amount?
How to value a variance swap before expiration (equation)? What happens to the sensitivity of Varswap to IV over time?
Worked through example varswap?
Using derivates to infer CME, FOMC moves, Inflation rates, Market volatility?
To forecast Fed fund rates need what? What is eq for prob of change in FF rate?
Example with equity swap, and how to protect from decline in price.
Example of cash equitization
Example of fixed income futures to to change allocation (increase bond amount)
Same example but 3 months later (bonds)
Same example but 3 months later (bonds)
Rebalancing example using futures
Changing AA using swaps example
Changing AA using swaps example (cont)
Equation for return on domestic currency
When calculating return on FX domestic currency must be price currency
How do you calculate domestic currency return on a portfolio of multiple foreign assets?
What is equation for CME?
Equation to hedge out currency risk
Example with CAD and UK investor
What does a currency risk management policy usually address? What is the 2 step process for AA with currency risk?
What are the two diversification considerations?
What are the cost considerations?
Describe the currency risk spectrum?
What is currency overlay, what is the range of services for out sourcing currency management?
Currency management programme: A portfolio should be closer to fully hedged the more it is….?
What are the Tactical currency management strategies of Econ fundamentals and technical analysis? What is UIRP?
Describe the carry trade technique and what does the forward rate bias and trading with one mean?
Under carry trade what types of currencies are invested in? Based on volatility trading?
What is a 100% passive hedge with forwards and what is dynamic and static hedging?
Explain the roll yield tool for CRM?
How does the amount of hedging vary wth forward points?
Explain the tool of currency options?
What are the 5 cost reduction strategies?
What must be considered when hedging multiple currencies?
Describe the cross hedge and macro hedge?
What is an example of a macro hedge?
What is the minimum variance hedge ratio?
The minimum variance hedge ratio only works when …?
What are the two main challenges of dealing with EM currencies?
Why are Non deliverable forwards used with EM currencies?
What are the diversification benefits of FI?
Explain for FI the benefits of regular CF’s and Inflation hedging potential?
Describe the liability based mandate for FI and cash-flow matching and duration matching?
For cash-flor and duration matching what are the yield curve assumptions, the mechanism, basic principle, rebalancing and overall complexity?
What is a total return mandate for FI?
What is the objective, portfolio weights, target risk factor, profile and turnover for pure indexing enhanced indexing and active management?
What are the considerations in mandates?
What is Macdur, Moddur and Efectdur?
What is key-rate duration, empirical duration and Money duration?
What is Price value basis point, convexity, effective convexity?
What is av Mdur, av convexity?
What is Effdur and Eff convexity formula?
What is spread diversion, DTS and portfolio dispersion?
Describe the liquidity characteristics of bonds?
Describe the liquidity among bond sub-sectors?
Describe how liquidity on bond PM
1) Pricing - many issues may have stale prices or prices that
are often estimated (recent transaction prices may
not be valid
What are alternatives to direct investment in bonds?
How can E(R) for bonds be decomposed?
Describe the difference view of yield spreads and view of benchmark yields in terms of effect? What is the rolldown return equation?
Describe the views of currency value changes and the estimation inputs?
What is the portfolio return equation?
Describe the futures contracts and swap agreements methods of leverage?
Describe the repurchase agreement method of leverage?
Describe the security lending method of leverage? Wht is the rebate rate?
What are the risks of leverage?
How does taxation effect Bonds in PM?
How do investment vehicles deal with bonds in PM?
Describe liability driven investing?
What are the types of liabilities and which metric should be used? What is single immunization liability?
If we dealing with coupon bonds what must you deal with and thus what will immunization require?
What are the equations for MacDur, Dispersion and convexity? What rate should assets target weighted average yield or cashflow yield? Compare portfolio vs weighted average for each of the above statistics?
For a single liability what are the three conditions in immunization?
What is the strategy for when zero variance in realised ROR, low variance and high variance?
Structural risk is what and what does it cause?
What is a cash flow matching portfolio?
What is the cash in advance constraint?
What is accounting defeasance?
What does a laddered portfolio do?
They provide better protection from…?
They balance cash flow reinvestment and…?
Where are bond reinvested at expiry?
Compare convexity across ladder, bullet and barbell portfolios?
What are the three conditions for duration mismatch? Compare the CF yield, Macdur, Moddur, Disperison, convexity between Assets and liabilities in duration matching
Note now modified duration
Duration must have an asset with ModDur…what and an asset with ModDur …what?
Explain how derivatives overlays can be used for duration matching
Derivatives overlay numerical example
What is contingent immunization?
PM can pursue an active mandate if what?
How can interest rate swaps be used to manage duration gaps, long or short adds duration?
BPV of a swap equation?
Notional principal equation?
Describe a buy reciever and payer swaption and when to exercise?
Describe selling a reciever and payer swaption and the payoff?
What is a swaption collar and its payoff?
How do interest rate anticipation strategy work?
Describe the strategy if you have high, medium and low conviction on the direction of rates for higher/lower?
Describe model risk, measurement error and implicit assumption that change in yield are equal for A,H,L for Liability driven investing?
Describe spread risk, counter-party credit risk, collateralisation risk and asset liquidity risk
What is benchmarking to a bond indexing, what are the three types of indexing?
Describe the benchmarking challenge that FI markets are much larger and broader?
Describe the array of characteristics challenge?
Describe the challenges of unique issuance and trading patterns and that index composition changes frequently?
What are the six primary risk factors?
Example of PV of distribution of CFs
What does passive assume and thus what should the portfolios risk profile be set to?
Full replication of index reflects reliefs that ….., thus it produces a portofolio that …., is this difficult and costly? What is enhanced index sampling?
Enhanced index sampling is done by…., reduces ……, and has tracking error that is…?
Describe the index-enhancing strategies of lower cost, issue selection and yield curve?
Describe sector/quality and call exposure enhancements?
Alternatives to direct investing: Charestics of FI mutual funds, ETF’s and Total return swaps (TRS)?
Describe the qualities of an index of unambiguous, investable, and measurable. Key differences between equity and bond portfolios: what does the finite nature of bond imply about duration over time and how do bond index risk characteristics reflect bond issuer propensity and preferences?
What is the BUMS problem?
