Bond And Money Markets Strategy Trading Analysis 1st Edition Moorad Choudhry - Solutions

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Discuss the signals being indicated by the chart at Figure 63.73, which is a chart for the S&P500. #2 Line Chart 15 MIN (1,0,0,0,0,0) SP M 33755 +60 0042289 33740 116K 33605 00 0938 0 33794 Buy on breakout upside (second due that bottom areas being made) Higher bottom Zoom 1145 0930 1400 1145
What is a “petrifying pattern”? When would one expect to see it?
How does one construct a point-and-figure chart? Consider Figure 63.43; what signals (if any) are being given?
List the strengths and weakness of moving average indicators.
What is the name for the pattern at Figure 63.68 below?
A market breaks past a resistance point suddenly and very quickly, way beyond expectations. It then snaps back, again without warning, and reverses the previous trend. What is the name for this pattern?
From the previous question, imagine now that there is a short-term correction. Remembering again that the trend line was at a steep angle, how should the trader expect the correction will take place, through a directional move or through sideways price action?
Using Gann lines on a chart a trader observes that the angle is fairly steep. What should the trader expect will happen, with regard to the previous trend?
You observe a “morning star” pattern that also includes a “doji,” and are currently running a short position in the contract you are analysing. What should you do?
A head-and-shoulders continuation pattern for the futures contract you are observing is followed by an ascending triangle. Did the market prediction indicated by the first pattern prove accurate? What if the following pattern had been a descending triangle?
Describe the main continuation patterns that are observed in the market.
What is the predictive power of a rounded bottom pattern?
Your junior trader suggests that the profit they are expecting on the two-year versus five-year bond spread position they have just put on is around nine basis points. They have put on a stop-loss at minus-five basis points.Are you happy with the stop-loss? Explain your answer.
An economist at a bank suggests that, as short-term interest rates have just been raised, after a long period of interest-rate stability, the country’s currency should hold up and there should be increased inward foreign capital flows. However the technical analyst feels that over the short-term
What is a “hanging man”?
Describe the major trend reversal patterns that may be observed in bar charting.
What is a Gann line?
The Treynor index is the most accurate measure of fund performance. Discuss.
If the risk-free rate of interest is 7.00%, the return of the market portfolio of bonds is 10.00%, the total risk is 12.00% and duration is 10 years, evaluate the performance of the fund manager.
An analyst is given the following information on a bond portfolio: Bond Asset allocation Return Specific risk Duration (years) 1 20% 9% 12% 5.11 234 2 25% 10% 10% 6.998 3 35% 11% 11% 9.05 4 20% 12% 13% 11.03
What is the difference between performance measurement and performance evaluation?
The risk-free rate of interest during the year was 10.00% and the return on the market was 19.00%.(a) rank the portfolios using the Sharpe ratio, Treynor’s index and Jensen’s index(b) from your calculations, how well was portfolio 5 managed?
The performance of five portfolios in the last year is shown below. Portfolio Return Standard deviation Beta 1 25 10 1.5 2 15 8 0.8 3 20 6 1.1 4 19 7 0.9 5 20 5 1.5
A fund reports a shift in its strategy as follows:“In the short-term we will shorten the duration of the portfolio from its current 7.81 years as we believe that interest rates are set to rise and that the economy will begin to experience strong growth. The duration shortening will be
A life assurance company has a range of liabilities that mature every six months starting from ten years, until 30 years. The present values of each liability are all different. How can a portfolio be constructed that would match the liabilities and also minimise immunisation risk?
Explain what is meant by cash flow matching. Why do you think this might be a popular fund management technique?
At the morning “shout”, the head of the fund management desk informs junior staff of the following points:(a) to reduce the exposure to widening credit spreads, which are anticipated as the economy slows down, the sector allocation to corporate bonds will be reduced by around 12–14%, with the
A money market trader at a bank invests in Japanese bank sterling Certificates of Deposit that the market demands a yield premium for, but which the trader believes are not risky. This is in effort to pick up yield.What strategy would this be described as?
A fund manager increases its allocation to corporate bonds in the belief that yield spreads will decrease as the economy recovers from recession, as interest rates rise and, in the more confident environment, credit ratings are upgraded. What strategy is the fund manager adopting? On what occasions
Explain the principles of immunisation. What is meant by dynamic rebalancing of a portfolio, and why is it necessary?
An investor wishes to invest £1000 in a bond portfolio that is composed of the following two bonds:(a) calculate the duration of each bond (you may wish to review Chapter 7 again)(b) how much funds should the investor place in bonds 1 and 2 in order to create a bond portfolio with a duration of
The fixed interest pages of a financial journal contain the following:“Farhana Rahman, fund manager of the ABC Bank’s £1 billion bond portfolio, is moving out the current ladder strategy and into a barbell strategy. This will involve the sale of the four- and fiveyear bonds, both corporate and
What is tracking error? How can it be reduced? Is it possible to eliminate it completely?
Speaking off-the-record to a financial journalist, a fund manager states the following:“We shall be entering into a barbell position with new inward funds and funds from maturing bonds being used to buy five-year and 25-year government bonds. Therefore our position in‘govies’ will increase by
Consider the two portfolios below, 1 and 2, both of which have a market value of £1 billion. Assume that bonds are trading at par, and that the portfolio durations are identical.(a) Identify the bullet portfolio and the barbell portfolio.(b) Will each portfolio respond in the same way if there is
Indexation is essentially a structured portfolio strategy, but has elements of both active and passive approaches included in it. Discuss.
What is a structured portfolio strategy?
Discuss the relative merits of passive versus active portfolio management strategies. Why might an investor wish to place his assets in a tracker fund?
What practical reasons cause a passive index fund to underperform the market index?
For what reasons might a bond fund manager consider switching bond positions?
What are the three main segments of an active portfolio management strategy?
Consider the following data:Expected return on shares: 22%Expected return on bonds: 8%Variance of return on shares: 9%Variance of return on bonds: 4%Correlation between share and bond returns: 0.6 Calculate the optimal mix of shares and bonds for investors with a risk tolerance of:(a) 1(b) 2.5(c)
Discuss the rationale behind active and passive portfolio management.
From the real yields reported in a national newspaper of your choice (for example, the Financial Times for index-linked gilt yields), fit the discount function for the complete sample of bonds, using the method described in the text.
How can the McCulloch technique for fitting the zero-coupon term structure be adapted for use in estimating a real term structure?
Discuss the issues involved in estimating and fitting a real term structure of interest rates. What purposes is the real term structure used for?
From Nelson and Siegel’s original model of the forward rate curve, derive the expression for the spot rate.
Consider the following hypothetical set of risk-free coupon bonds:Write down (but do not solve) the expression that must be solved to fit the term structure in this yield curve environment using the (a) regression-based method;(b) the Fisher method;(c) the VRP method as proposed by Waggoner. 1234in
What are the advantages of using a cubic spline-based technique for fitting the term structure?
Discuss the differing requirements that central monetary authorities and market practitioners have for theoretical spot and forward curves.
Under certain circumstances a no-arbitrage model is unsuitable and an equilibrium model must be used.Discuss the different situations that might lead to this.
How does the Black–Karasinski model describe the dynamics of the short-rate? How does this differ from the approach adopted by the Vasicek and Cox–Ingersoll–Ross models?
Discuss the circumstances in which it is advisable to use a single-factor model rather than a multi-factor model.
In the Brennan–Schwartz model, describe the process followed by the price of a zero-coupon bond P(t,T).
What are advantages and disadvantages of a one-factor model compared to a two-factor or multi-factor model?
Explain the difference between an equilibrium model and an arbitrage-free model.
Calculate the price of a risk-free zero-coupon bond that expires in five years’ time, when the current short-rate is 6.50%, a is 0.30, b is 0.08 and the standard deviation of the short-rate is 5%. Use the Vasicek model, the Ho–Lee model and the Cox–Ingersoll–Ross model and compare the
The current short-rate is 10%, and is assumed to have an annualised volatility of 1%. At a future date the short-rate moves to 5%. What assumption is made about the short-rate volatility in(a) the Vasicek model(b) the Cox–Ingersoll–Ross model(c) the Black–Derman–Toy model?
Certain interest-rate models assume that short-rates (as well as bond price and yields, and forward rates)follow a normal distribution and that all possible values of the rate have equal probability of occurring. What effect does this have in practice under certain conditions that may render the
You are given the following values: a is 0.25, b is 0.05 and the standard deviation is 0.095. Use the Vasicek model to calculate the value of a six-month European call option written on a zero-coupon bond that matures in one year at par value of 100, when the option is struck at 94 and the current
Repeat the question above for the Cox–Ingersoll–Ross model and the extended Vasicek model.
For the one-factor Ho–Lee model, construct a binomial tree with the following parameters: a is 0.07, standard deviation is 0.06, the instantaneous short-rate is 5.50% with a drift of 0.02t. If one time period is six months, use the tree to calculate the price of a government zero-coupon bond with
In the Vasicek model what is the effect of increasing the current shirt-rate? Of increasing the standard deviation?
For the time period T − t, where T > t, write down the mathematical equation which states that the period(T − t) multiplied by the spot interest rate applicable at time t for maturity at T, produces the sum of the set of forward interest rates from time t to T.
In an interest rate environment with 5% annualised rates, consider a financial instrument with a tenor of three months. What is the instrument’s rate of return under annual compounding? Monthly compounding? What is the equivalent continuously compounded rate of interest?
Discuss the key financing considerations with regard to a yield spread trade conducted with cash bonds.
A trader observes the following short-sterling futures prices:June 95.50 September 95.67 December 95.70 and purchases 100 butterfly spreads. One week later the prices stand as follows:June 95.36 September 95.56 December 95.60 Calculate the position profit or loss if the trader unwinds their
Describe a strategy that a trader might follow if the following set of short-sterling interest-rate futures prices were observed:September 2000 93.65 December 2000 93.66 March 2001 93.80
A trader expects short-term interest rates to fall relative to long-term rates. Describe one way in which they could trade this view.
Why are most spread trades carried out in the exchange-traded futures and options markets rather than in the cash markets?
What are the differences between speculation and arbitrage?
What are the hedging implications of a short position in a down-and-in barrier option?
What is a basket option?
Write down the terms for the payoff from an average-rate option. What is the difference compared to an average-strike option.
What sort of market risk exposure do you think would be best hedged using a lookback option?
What is the value of a down-and-in call option whose barrier is below the strike price?
What is the payoff profile of an all-or-nothing option?
What is a binary option?
How would a bank price an average-rate Asian option where the rate is an arithmetic average? Why does hedging such an option present fewer problems when using the cash underlying as a hedge instrument compared to barrier options?
What is a path-dependent option?
How does the protective put benefit the holder of a long position in bonds compared to a hedge consisting of futures?
Describe the structure of a protective put.
What are the risks associated with a short straddle position?
What is the difference between a bull call and a bull put spread?
If a diagonal spread is constructed with a 70 long call and a 90 short call. The short call expires after the long call. Draw a diagram of the expected payoff profile. What would be the effect if the trade put on was a 90 long call and a 70 short call?
What strategies might be employed by an options trader that felt that the market was going to experience a sudden shock, but was unsure of the market direction itself? What strategy might they employ if they thought the market would remain roughly where it was over the next few months?
If a strangle is constructed with the call strike price at a lower level than the put strike price, what is the trader’s expectations of the market and volatility?
What is the expected profit payoff for an option strategy consisting of the following:(a) long underlying asset and short call(b) long underlying asset and long put
Summarise the risks associated with running an option book that is short gamma.
A three-month European call option written on a non-dividend paying asset where the risk-free interest rate is 5.50% and the underlying asset volatility is 17.8%. What is the option delta?
What are the risks associated with gamma in an option?
What is a volatility trade?
Summarise the change in the delta of a call option for a change in each of the five option pricing parameters, assuming only one parameter changes at a time.
What is an option’s colour?
If price returns of a particular asset follow a stochastic volatility model, what would you expect to observe about the implied volatility of a series of options written on the asset, over a range of strike prices, that have been priced using the B–S model?
The delta of an option is 0.45. Assuming one option is written on one unit if underlying assets, how would you hedge a short position in 2000 out options?
Is high theta value a positive thing for an option market maker to have? What caveat would you place on your answer?
What use is made of an option’s lambda?
What limitations does the traditional approach to corporate bond valuation suffer from?

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Bond And Money Markets Strategy Trading Analysis 1st Edition Moorad Choudhry - Solutions

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