By F. Hagenstein, Tim Bangemann
The authors give you the reader with an intensive instrument set for energetic and profitable administration of mounted source of revenue portfolios in addition to for credit. the point of interest of debate is on quantitative and, for credit, qualitative tools of portfolio administration. those recommendations should be hired for portfolio diversification and with a view to outperform the benchmark. equipment appropriate for various hazard components - length, yield curve, foundation, volatility and credits administration - are illustrated intimately utilizing a top-down and bottom-up method. numerous examples are awarded to teach the sensible relevance of the theoretical versions and strategy.
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Extra info for Active Fixed Income and Credit Management
The yield of the body bond is known from market prices, but the yield of the portfolio consisting of the two wing bonds is not easily determined. Theoretically the yield of a portfolio equals the internal rate of return of its individual cash ﬂows. This is a complex iterative calculation, so in practice two methods are used as approximations: ■ proceeds-weighted yield pick-up method ■ duration-weighted yield pick-up method. The proceeds-weighted yield pick-up method calculates the yield of the portfolio with the two wing bonds by weighting their cash components.
This means that a bond increases in value more as yields decrease, compared with the loss in value as yields increase. Convexity is therefore a desirable characteristic. Strips allow for the construction of strategies for given maturities with higher convexity than is possible using only conventional bonds. Strips can therefore proﬁt from high volatility. This statement is true even though the convexity of strips is lower than the convexity of conventional bonds with the same duration, since a duration-neutral switch requires a larger amount of strips.
Naturally, it is also possible to set up a barbell trade using bond futures (for example, long Schatz and Bund futures with short Bobl futures). How and when to substitute cash bonds with bond futures is analysed in Chapter 4, which discusses basis management. 7 Proﬁt/loss for type (a) barbell for different curve scenarios Barbell type (a) Duration- and cash-neutral (long 2y and 10y vs. 5y) Flattening by 10 bps No change Steepening by 10 bps Yield increase by 50 bps 23,479 183 −22,790 No increase 24,748 0 −24,409 Yield decrease by 50 bps 29,048 2,762 −23,166 steepening or flattening scenarios, or both.