Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Bond indexation serves the purpose of replicating the performance of a predetermined benchmark as closely as possible. These benchmarks are generally very broader in terms of number of bonds encompassed. For example, in countries like US and Europe, the most common indices include several thousands bonds. Further, the turnover on indices is substantially quite large. This is because of substantial proportion of the bonds maturing each year and significant amounts being issued each year. Very frequently, large segments of bond market behave illiquid. Hence, futures on bond indices are currently a rare phenomenon. In general they are based on notional bonds.
Now, let us discuss about indexing technology. In this section, we will focus on stratified and optimization sampling techniques.
Stratified Sampling: Stratified sampling aims to limit the number of bonds included in the indexed portfolio and also avoid trading too small bond positions. In addition, it also tries to avoid being in the illiquid segment of the market. Under stratified sampling, an indexed portfolio is constructed through following below given steps:
-
Initially, the universe of bonds in the benchmark is divided into cells on the basis of certain characteristics of bonds. The characteristics include coupon, term to maturity duration, quality rating and sector etc. Subsequently, the weight of each cell is determined given the weights of bonds in the benchmark.
In the second step, for each cell with non-zero weight, a limited number of bonds belonging to the cell are selected and a price weighted portfolio is created. This portfolio matches as closely as possible some of the average characteristics of the cell such as its average duration, convexity etc., and holds appropriate weight in the indexed portfolio.
In case of bonds, the rationing in the number of bonds comes from the explicit limit the indexer imposes while building a bond portfolio for each cell.
Optimized Sampling: Optimized sampling overcomes the drawbacks of stratified sampling approach. It has the following advantages.
It provides an ex-ante measure of the tracking error of the indexed portfolio with regard to benchmark.
It gives access to an optimizer, which facilitates construction of a portfolio by considering the risk trade-off between factors and the transaction costs.
It allows the indexer to choose the level of tracking error to be achieved by limiting the number of bonds in the indexed portfolio.
Q. Advantages of Just-in-time inventory management? JIT inventory management methods look for eliminate waste at all stages of the manufacturing process by minimising or elimin
evaluate the importance of leverage in financial management of a small scale company
Portfolios are simply combinations of different securities. The characteristics of investments do differ when we possess them in combinations or portfolios. As we shall see, an ass
In US, savings and loan associations constitute the major originating group of the traditional loans. What types of properties can be mortgaged?
Techiniques of capm Effects of capm
B.J. Industries has a current ratio of 2.5, with $2.5 million in current assets. Due to sales growth, the company wants to expand accounts receivable and inventories by
State a process for benchmarking 1. Gain senior management commitment to establish benchmarking as a process within the organisation and educate stakeholders and staff about t
International mortgage-backed securities are the mortgage-backed securities that are issued in a country by a non-domestic entity. With limited size of the Indian
what that mean?
Explain how to compute the overall balance and discuss its significance. The overall BOP is defined by computing the cumulative balance of payments involving the current account,
Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd