Risk Management Applications of Forwards and Futures Strategies Flashcards
FRA payoff
The relationship between the change in the bond price and its yield
- B = the bond price
- yB = the bond yield
- DURB = Macaulay duration
- MDURB = Modified duration = DURB / (1 + yB)
Basis point value (BPV), present value of a basis point (PVBP), or price value of a basis point (PVBP)
- B = the bond price
- yB = the bond yield
- DURB = Macaulay duration
- MDURB = Modified duration = DURB / (1 + yB)
The sensitivity of the futures price to a yield change
- f = the futures price
- yf = the implied yield on the futures
- Δyf is the basis point change in the implied yield on the futures
- MDURf = Modified duration of the futures
Number of futures required to hedge a bond portfolio
- ΔB + NfΔf = 0
- Nf = –ΔB/Δf
- In this example ΔyB/Δyf = 1
Number of futures required to rebalance the portfolio to a target duration MDURT considering the yield beta (βy)
- ΔyB = βyΔyf
Number of futures required to rebalance the portfolio to a target duration MDURT
Number of futures required to rebalance the portfolio to a target beta
Number of futures required to create a synthetic index fund
- q = futures multiplier
- f = futures price
- T = time to expiration of the futures
- r = risk-free rate
Notional invested in risk-free bonds using the rounded number of futures Nf*
Number of stocks effectively purchased with a futures position
- δ = dividend yield
Payoff of a synthetic index fund position
- = Nf*q (ST - f)
- f is the price paid for the futures
Creating synthetic cash
Translation exposure
The risk associated with the conversion of foreign financial statements into domestic currency
Transaction exposure
The risk associated with a foreign exchange rate on a specific business transaction such as a purchase or sale
Synthetic stock position
