P5-Yield Curve Strategies Flashcards
(22 cards)
Explain the difference between change in level, slope and curvature, think in a plot of duration and YTM
Recall the decomposition of return FI income
Explain the concept of a barbell portifolio vs. 100% weight portifolio
Babell portifolio has multiple maturities.
Formula of convexity, explain the relationship of convexity in a scenario of increase/ deacrease in yield
1/2
C= Convexity
AY= delta yield
When Δy is positive → price falls, but convexity adds back some value
When Δy is negative → price rises, and convexity adds even more to the gain
Explain the strategy of rolling down the yield curve
Is buy longer maturity bond, as times passes and yield reduces you sell the bond before colecting the price appreciation.
Explain the strategy of repo carry trade
Return is enhanced by borrowing at a lower rate to invest in assets that have a higher rate of return
In a manager believe that benchmark yield curve will shift down, he can increase return by _______ (increasing/decreasing) duration
Increase, because is a bulish view that
Expain the difference between bull steepener and bear steepener (think in plot)
Bull steepener is the expectation of short rates fall more than long term rates
Tips: Steeper means the diference betwen long and shor term increase flatter otherway around
Explain the difrence between bear flatterner and bull flatterner (think in plot)
bull flatterner is the expectation that long term rates will fall more than short term rates
Tips: Steeper means the diference betwen long and shor term increase flatter otherway around
Remember the concept off a callable bond and how change duration of the bond
Callable bond give to issuer the right to buy back the bond from investor before maturity.
Explain how to profit in a scenario of positive butterfly
Short sell the midle and long the wings
Remember the concept off a putable bond and how change duration of the bond
Putable bond give to the investor the right to sell back the bond from investor before maturity.
Formula for effective duration and why it’s appropriate for embedded options bonds
Options change duration after price of exercise to capture this is important to see the cash impact
Explain the reationship of adding a call/put option on a bond price or a bond future contract
valuable as rates rise; hence, a payer swaption decreases the duration of the portfolio.
A receiver swaption gives the holder the right to enter a receive-fixed swap. This
becomes valuable as rates fall; hence, a receiver swaption increases the duration of the
portfolio.
Explain the key rate duration and formula
Measures the sensitivy of a portifolio to a movement key maturity rate while others remain constant.
More easily to calculate when you have zero coupon bonds.
Formula o macaulay duration for zero coupon bonds “simplification”
Explain the relationship between profitabilit of swapoptions and the expectation of downward/ upward shift in curve
Formula of unhedged foreign bond position
Remember the relationship of uncovered interest rate parity (UIRP) and movement of fx if the relationship hold and unhold
if the condition HOLD, fx should converge to foward rates by difference in interest rates. But in pratice tends to move uncorrelated with this statement.
Explain uncovered interest rate parity say’s if a manager choose not hedge.
States that high interest rates currencies should actually depreciate over time, such that all unhedged invertors earn the same return, regardless of which currency they hold.
Remember the carry trade strategy
Borrow in a countrie with lower interest rates and invest in anothwer w/ higher interest rates
