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!
Question 1
(a) Prepayment refers to paying principal on a security before the due date. Prepayment risk is the risk associated with the early unscheduled return of principal on the mortgage pass-through security. The prepayment risks include two main risks namely extension risk and contraction risk.
Extension risk is the risk of the security lengthening in duration owing to the deceleration of payments. Prepayment delays when the interest rates increase because principal cannot be reinvested as much at higher rates. Extension risk occurs because the average life of return of principal gets extended. Extension can be adverse when security is trading at a discount because it delays reinvestment of principal at higher interest rates. Extension may also be beneficial when security is trading at a premium because it delays reinvestment of principal at lower rates.
Contraction risk is the risk of the security shortening in duration owing to acceleration of payments. Prepayment accelerates when interest rates lower, because upside price potential is restricted and cash flows will be reinvested at lower rates. Contraction risk occurs because the average life of return of principal gets shortened. Contraction can be adverse when security is trading at a premium because of capital loss and reinvestment can be made at lower rates. Contraction can be beneficial when security is trading at a discount because of capital gain and reinvestment can be made at higher rates.
(b) Tranche I has a higher OAS and lower option cost as compared to Tranche II and the effective durations of the two tranches are equal. Rich and cheap securities are identified by comparing the OAS and option costs of the given tranches in a CMO deal. For a given Z-spread and effective duration, cheap securities will normally have high OAS relative to the required OAS and low option costs and rich securities will have low OAS relative the required OAS and high option costs. Cheap securities are undervalued and hence must be bought and vice versa for rich securities. Here Tranche I is undervalued on a relative basis and Tranche II is overvalued, implying that Tranche I is less expensive as compared to Tranche II. Thus Tranche I must be bought and Tranche II must be sold.
Beta- measure of systematic risk for an investor who holds the shares of one company, it is total variance that is more relevant. But for most usual active investor who wishes to d
policies for non-cash generating assets
An insurance company is investigating offering kidnap and ransom insurance. Policies are to be sold to multinational companies to provide cover for certain named employees who are
what is the definition of risk management
Question: a) Using illustrative and numerical example, differentiate between speculation and arbitraging in the context of foreign exchange market. b) One year borrowing and
Question 1: Define the following terms: (a) Whole life assurance (b) Immediate annuity (c) Market Liquidity Risk (d) With-pro
Increasingly, organizations are using computer-based tools for contracting, tendering, and procuring to meet project deliverable requirements. Along with the benefits, there are so
what are the methods for location selection
In a report not to exceed five double-spaced typewritten pages, analyze the results obtained from the three simulations performed, identify the source of the differences, and selec
What is Risk management Risk management is to recognise the risks to which company is exposed to, consider the trade-off between risks and expected returns, and c
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: +1-415-670-9521
Phone: +1-415-670-9521
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd