By F. Hagenstein, Tim Bangemann
The authors give you the reader with an intensive instrument set for lively and profitable administration of fastened source of revenue portfolios in addition to for credit. the point of interest of dialogue is on quantitative and, for credit, qualitative equipment of portfolio administration. those recommendations can be hired for portfolio diversification and so as to outperform the benchmark. tools acceptable for various hazard elements - period, yield curve, foundation, volatility and credits administration - are illustrated intimately utilizing a top-down and bottom-up process. numerous examples are awarded to teach the sensible relevance of the theoretical versions and technique.
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Additional info for Active Fixed Income and Credit Management
The ‘steepening by 10 bps’ (‘ﬂattening by 10 bps’) refers to a scenario where both yield spreads, 2y versus 5y and 5y versus 10y, widen (ﬂatten) by 10 basis points. The table conﬁrms that the cash-neutral barbell proﬁts from a curve ﬂattening – approximately EUR 25,000 for the position, with nominal values EUR 57m in 2y, EUR 100m in 5y, and EUR 43m in 10y. The example also shows that the barbell is durationneutral, as parallel shifts of 50 bps do not provide any gains or losses. The proﬁt/loss for parallel shifts of 50 bps is not exactly equal to zero because duration-neutrality provides a ﬁrst-order hedge; and for large market moves, higher order factors, in particular convexity, also play (small) roles.
Therefore, in the case of a ﬂat curve the theoretical zero curve is identical to that of the theoretical par curve. An inverted curve The theoretical zero curve has to lie below that of the par curve, as the yield of the bond is impacted by the facts that the investor receives coupon payments before maturity and the discount factors for these coupon payments are higher, when the nominal amount of the bond is paid out, than at maturity. Additionally, the spread between zero-coupon bond yields and coupon-bearing bond yields should increase negatively, so zero-coupon bonds will always have a lower yield compared with conventional bonds.
From 1999, the ECB has reacted to Euro-11 data, and for this reason the ﬁt cannot be expected to be as good as pre-EMU. It follows, however, that ECB monetary policy at time of writing (October 2001) is too tight for Germany. The flattening or steepening and the changes in the convexity or concavity of yield curves are examined here using different examples. 1 IFO (4 months forward) and slope 10y–2y: October 2001 Source: Merrill Lynch From these, it becomes apparent that the direction of the market – or the yield levels of certain maturity sectors – is decisive for the shape of the curve.