# CFA III SS 10 Global Bonds and Fixed-Income Derivatives

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1. Duration of equity in leveraged portfolio

• Basically
• De = duration of equity
• Db = duration of borrowed
• Dp = duration of portfolio
2. Description; drawbacks of following bond measures of risk
1. variance/std dev
2. semivariance
3. shortfall risk
4. value at risk
• 1. dispersion around mean; returns are non-normal, requires n(n+1)/2 inputs, inputs constantly changing
• 2. dispersion results below target return; same as above, and less accurate b/c uses half of the data
• 3. probability that actual return is less than target return; provides probability only, not what level of losses could be below target
• 4. estimated loss over specified time period at specified probability; does not quantify what happens to return at less than the specified probability - ex. 50% chance lose 5%, but may be a 30% chance lose 90% that is not communicated
3. Compute number of futures contracts needed for desired portfolio duration
• Dt = target duration
• Dp = current duration
• Vp = value of portfolio
• Dctd = duration of cheapest to deliver
• Pctd = price of cheapest to deliver
• CF = ctd conversion factor
• Yield Beta = ratio of yield changes for item being hedged and CTD; yield beta is 1 unless told otherwise
4. Calculate duration of a swap
• Dasset - Dliab, so Dreceive - Dpay
• Drec = reset period (in years) / 2; usually .5/2 = .25
• Dpay = .75*(swap length in years)
5. Calculate the duration of an option
Dopt = Delta of option * Duration underlying * (Price underlying/Price option)
6. Three types of credit risk
• default risk