Trading Game Strategy

Trading Game Strategy - Extra Recitation Trading Game...

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Extra Recitation – Trading Game Strategy Jiro E. Kondo
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Preview of Recitation Brief Overview of the Case. First Step : Analyzing your Assets and Liabilities. Ways to assess the value of your liabilities. Nature of your investment problem. Hazard #1 : Don’t blindly equate durations! Hazard #2 : Don’t try perfectly matching your Asset CFs and your Liability CFs. Strategy #1 : Undertake some risks. Riding the yield curve. Undertaking some credit risk. Hazard #3 : Don’t overestimate your return from bearing risk. Hazard #4 : Don’t take on too much risk. Strategy #2 : Speculate on market movements. Caveat… it’s tough to predict market movements! You’ll need to explain convincingly why you’re speculating in a certain direction. Big Picture : Understand the trade-offs your making and think about them with some care.
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Brief Overview of the Case Hired to manage Quest of Toys’ defined-benefits pension plan and re-evaluate its strategy. Current fixed-income portfolio worth about $84M. Want this portfolio to cover liabilities due to current retired employees. How does the value of assets compare to the current value of those liabilities? Want to avoid excessive risk and speculation. Because Quest would need to make additional contributions to make up for any shortfalls in the portfolios ability to cover the pension liabilities. But is undertaking some risk be necessary ? More to come on this…
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First Step: Analyzing Your Assets and Liabilities Analyzing your liabilities : Need to determine the value of these liabilities. Method 1 : Find the value of a matched portfolio (e.g. using a variety of strips). This is equivalent to pinning down the relevant parts of the term structure.
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