Class 3 Annotated Slides

# Fi risk management using derivatives square6

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FI Risk Management Using Derivatives square6 Immunizing a bond portfolio, B boxshadowdwn The Treasury yield and Portfolio yield don’t move in lock-step. We can establish a beta such that:

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FI Risk Management Using Derivatives Dollar Duration square6 Duration relates yield changes to % change in the portfolio value square6 Dollar duration = Bond Portfolio value x Duration square6 Price Value of Basis Point, PVBP = B x D x 0.0001 square6 If we want to target a certain duration D_t:
Dollar Duration square6 If Treasury yield and Portfolio yield don’t move in lock-step, we can adjust the formula to: boxshadowdwn This is the same formula as before, if we set D_T to 0 Duration Management Example square6 How many treasury futures contract we need? square6 Portfolio yield is 5% more sensitive than futures (i.e. beta = 1.05)

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P&L for the portfolio boxshadowdwn \$ Profit if T yld down by 35 bp, and Port Yld by 40 bp? P&L for the portfolio boxshadowdwn % Profit if T yld down by 35 bp, and Port Yld by 40 bp?
P&L for the portfolio boxshadowdwn Measured duration if T yld down by 35 bp, and Port Yld by 40 bp? Equity Risk Management with Derivatives square6 Instead of duration, we’ll use beta to market square6 What if target beta is 0?

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Equity Risk Management with Derivatives square6 Increasing portfolio beta (Tactical Shift) Equity Risk Management with Derivatives After 2 months, market is up 4.4%, what’s the portfolio P&L, performance, beta?
Equity Risk Management with Derivatives After 2 months, market is up 4.4%, what’s the portfolio P&L, performance, effective beta?

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