General Flashcards
(28 cards)
What is Systemic Risk
Risk of collapse of the financial system as a whole
What is Systematic Risk
(Aka Market Risk) Risk that affects the market as a whole. Eg Interest rate risk, Currency Risk. Cannot be diversified away.
What is Unsystematic Risk
(Aka Specific Risk) Relates to specific or particular investments eg, Issuer Risk, Liquidity Risk. Can be diversified away.
What is Beta
Beta measures the extent to which price movements of an asset are in line with a benchmark/market (Systematic risk)
What is Standard Deviation
How far on average returns deviate from the mean return (volatility)
What does the Sharpe ratio measure?
Measures the return above the risk-free rate from an undiversified equity portfolio, for each unit of risk assumed
What does the Treynor ratio measure?
Measures the return above the risk-free rate from an diversified equity portfolio, for each unit of risk assumed
What does the Jensen Alpha measure?
Evaluates performance of a well-diversified portfolio against a CAPM benchmark (with the same level of BETA as the portfolio)
What is Cash Flow-Matching?
Passive Bond Strategy
Purchasing bonds whose redemption proceeds meet a liability as it falls due
What is Immunisation
Passive bond strategy
An investor buys a portfolio of bonds with a duration (not maturity) equal to any liabilities - aka Bullet Strategy
What is Combination Matching
Passive Bond Strategy
Mix of Cash Matching and Duration Matching. Cash match the near-dated liabilities and duration match the longer-dates liabilities.
What is the minimum bid for UK T-bills and multiples thereafter?
£500,000 minimum and multiples of £50,000.
(Secondary trading = multiples of £25,000)
What is a Certificate of Deposit (CD) ?
An investor invests a lump sum at a bank which is locked in for a term. A Certificate of Deposit is a tradable instrument which allows the investor to sell the certificate representing the deposit, to allow liquidity.
What is a Repurchase Agreement (Repos) ?
A form of (collateralised) borrowing whereby a Gilt is exchanged for cash, with an agreement to repurchase the Gilt at a later date (+ Repo rate)
In FX Forward Rate pip adjustments, what is the rule for subtracting or adding the forward adjustment?
Bid < Offer = add
Offer < Bid = subtract
How would you calculate a Forward rate pip adjustment?
Spot rate +/- Forward pip adjustment
What are the 3 (time) categories of conventional gilts?
Shorts = less than 7 years
Mediums = 7 - 15 years
Longs = more than 15 years
What is the relationship between bond length and yield
The longer the length to maturity, the higher the bond yield
Describe the process of Asset Backed Security
Mortgages are sold by a lender to a SPV who pools the mortgages and produces ABSs to sell to Investment Firms
Explain the role of Inter-dealer brokers (IDB)
Where a GEMM does not physically have gilts for delivery to an investor, they can enter a transaction with an IDB, acting as central counterpart, which buys from one GEMM and sells the required gilts to the other GEMM
When a bond is priced below par, what is the effect on Flat Yield & GRY in regards to coupon?
Flat Yield higher than coupon rate and GRY higher than Flat Yield
Coupon < Flat Yield < GRY
When a bond is priced above par, what is the effect on Flat Yield & GRY in regards to coupon?
Flat yield is lower than coupon and GRY lower than Flat Yield
Coupon > Flat Yield > GRY
What bond’s prices are more sensitive to interest rate changes?
Longer dated & smaller coupon
What bond’s prices are less sensitive to interest rate changes?
Shorter dates & larger coupon
