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!
Return Enhancement can be explained using following heads:
Use of a Valuation Model: An investor having access to a bond valuation model can build a bond portfolio from bonds that are designated as mispriced on the low side by the model. A significant point here is - the nature of a bond valuation model is much more technical compared to equities. Further, fungibility or interchangeability between bonds in terms of their risk characteristics is more than that found in equities. In other words, the switches in between bonds that may be suggested by a valuation model have more true arbitrage characteristics than the switches among equities.
Options Overwriting: A portfolio manager can enhance the returns of a bond portfolio through options overwriting, which means writing interest rate related calls or puts. The forecast for bonds depends on the timing of long-term interest rates.
Minimization of the Value of the Bond Portfolio: The portfolio manager can minimize the value of the bond portfolio while implementing liability funding methods. For example, let us discuss the return enhancement technique while immunizing a single liability. Suppose the problem of the portfolio manager is
The two constraints the portfolio manager experiences are:
In the above equations Pi denotes price of bond i.
The first constraint results in an asset portfolio composed of only bonds. The second constraint causes the duration of the bond portfolio to match the duration of the liability. This technique of optimization is popularly known as linear programming. Such a problem can be solved in a simple way by using well established algorithms. The portfolio manager has to make sure whether the internal rate of return of the bond portfolio thus constructed is more or less similar to the rate he has used to discount the present value of the liability. If not, the portfolio manager in order to discount the liability must optimize again using the internal rate of return of the earlier optimal portfolio.
An important point here is the choice of the set of bonds over which the optimization will take place. Such set must be homogeneous in terms of quality rating. Otherwise, the optimized portfolio will concentrate just on those bonds that result in higher yields as they are cheap and does not consider their risky nature.
Assume today is 3 December 2009. Helen is 30 years old and has a Bachelor of Business. She is currently employed as a personal banker for ANZ banking group in Sydney and earns $380
A friend is looking for advice on one of his investments, KER. KER manufactures stationery supplies, the entity appointed a new Chairman in 2008 and since then has been executed an
Need to Widen and Deepen the Government Securities Market The importance of the Government Securities markets can be evaluated from three angles as follows: From the Gove
Q. What do you mean by Letter of Credit? A letter of credit is an arrangement whereby a bank helps its customer to obtain credit from its (customer's) suppliers. When a bank op
Definition of 'Bank Credit': The amount of credit available to a business or individual from the banking system. It is the aggregate of the amount of funds financial instituti
Portfolio Management: Project Portfolio Management (PPM) is the centralized management of processes, technologies and methods used by project management offices (PMOs) and pro
Day count convention is a system used to determine the number of days between two coupon dates. It is important in calculating accrued interest and present value
Prices and Yields The face value of the government security is Rs.100 or Rs.1,000. Earlier, that is, before 1950s the government bonds were issued at a discount. There was no f
The management of Border Bank has asked you to help with it with its market risk calculations. It has compiled the following data on its financial assets: • $500 million of amorti
TR has recently been promoted to his first management position. In the past, he very much enjoyed working as part of a team, but is having some difficulty in adapting to his new ro
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