R19: LDI & Index-based Flashcards Preview

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Flashcards in R19: LDI & Index-based Deck (11)
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1
Q

What’s the duration gap and what happens if the investment horizon is more than the duration and viceversa?

A

McD - Investment horizon.

If IH > D, negative, reinvestment risk (good if i/r increase).

If D > IH, positive, price risk (good if i/r fall).

2
Q

What’s the rebalancing ratio?

A

Old $D/New $D

3
Q

Single liability immunisation characteristics?

A

McD of assets = McD of liabilities
PV of assets => PV of liabilities
Minimise convexity (to keep structural risk low)
Monitor and rebalance

4
Q

Multiple liabilities immunisation (duration matching) characteristics?

A

Modified D of assets = Modified D of liabilities
PV of assets => PV of liabilities
Convexity of assets slightly more than convexity of liabilities
Monitor and rebalance

5
Q

Cash flow matching vs immunisation?

A

CF is more expensive but no rebalancing and monitoring, less assets available, simpler.

6
Q

What’s accounting defeasance?

A

Remove A & L from BS

7
Q

What’s horizon matching?

A

Near-term liabilities cash flow matched

Long-term liabilities duration matched

8
Q

What are other types of risk to FI PM?

A
Embedded options (uncertainty of timing and value of CFs)
Model risk (wrong assumption or model)
Spread risk
Counterparty risk (default OTC)
Collateral exhaustion risk
Liquidity risk
9
Q

What are the primary indexing risk factors?

A
Duration
Key rate duration
Sector and quality %
Sector duration contribution
Quality spread duration contribution
Sector/coupon/maturity weights
Issuer exposure
10
Q

What are the types of enhanced indexing?

A

Lower cost enhancements
Issuer selection enhancements (got vs corp)
Yield curve enhancements (ST vs LT)
Sector and quality enhancements (AAA vs AA)
Call exposure enhancements (callable vs vanilla)
ESG

11
Q

What are the problems with bond indexes?

A
Lack of liquidity
Heterogeneity 
More frequent reconstruction/turnover 
Bums problem
Difficult to match desired risk