CFA III SS 10 Global Bonds and Fixed-Income Derivatives.txt

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chcukles
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271142
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CFA III SS 10 Global Bonds and Fixed-Income Derivatives.txt
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2014-04-19 17:50:25
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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
    • downgrade risk
    • credit spread risk
  7. 1. Credit option
    2. Credit forward
    3. Credit swap
    • 1. option can be on spread or price
    • 2. forwards where payment depends on credit spread at maturity
    • 3. CDS - pay premium and receive in event of default
  8. change in foreign bond value in a domestic portfolio
    • duration * Byield * change in domestic yield * 100
    • Yield beta = regression of foreign yield on domestic yield (beta term)
  9. interest rate parity
    F [d/f] = S [d/f] * (1+rd/1+rf)

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