Schweser Cfa Level 3 Quicksheet
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RISK MANAGEMENT continued. Credit Risk to an option is borne by the long position only.
Because nonfinancial risks can be difficult to quantify, managers will buy insurance protection rather than try to estimate VAR. Methods for Managing Market Risk: Position limits, liquidity limits, performance stopouts, and risk factor limits. Risk Budgeting – The process of determining which risks are acceptable and how total enterprise risk should be allocated across business units or portfolio managers. Measures to help control credit risk are limiting exposure to any single debtor, marking to market, assigning collateral to loans, payment netting agreements, setting credit standards, and using credit derivatives. Risk-Adjusted Performance Measures include the Sharpe ratio, risk-adjusted return on invested capital (RAROC), return over maximum drawdown (RoMAD), and the Sortino ratio. Rp RoMAD = max. Drawdown Sortino =.
Butterfly Spread – Buy one call with low exercise price, buy another with a high exercise price, and short two calls with a medium exercise price. Buyer profits if stock price stays near price of written calls. Profit Long calls Two short calls S. Collar – Combination of a protective put and covered call. Owner of an asset buys a protective put and sells a call to pay for the put. If the premiums are equal, called a zero-cost collar.
Straddle – Purchase a call and a put with the same exercise price and expiration date. A bet on volatility: profit if the stock price experiences large movement in either direction. Profit exercise price R p − MAR long straddle downside deviation S Currency Management. Strategic Hedge Ratio – Manager has responsibility for managing the portfolio and currency exposure.
Currency Overlay – Separate manager follows IPS. Separate Asset Allocation – Managed by separate manager under separate guidelines. SS15: RISK AND DERIVATIVES Changing Portfolio Duration with Bond Futures Vp MD T − MDP # contracts = MDF Pf (multiplier) (. Box Spread – Combination of a bull call spread and a bear put spread on the same asset.
The payoff to combining the bull call and bear put spreads will produce the same payoff, regardless of the value of the underlying asset. (Risk-free rate) $ or% # contracts = N = ( THeld )(1 + R F )T (PF )( Multiplier ) Creating Synthetic (# contracts mustCash be a round number ) V (1 + R F )T # equity contracts = − P Pf Changing the Portfolio Beta with Equity Futures β − βP Vp # contracts = T βF PF (multiplier ) Altering Debt and Equity Allocations From equity to bonds: 1. Reduce systematic risk (beta) to zero by shorting stock index futures. ↑ duration of the synthetic cash (MDP = 0) by taking a long position in bond futures.
From bonds to equity: 1. Reduce all interest rate risk (MDT = 0) by shorting bond futures. ↑ equity exposure by buying equity index futures. MD = 0 assumes no short-term cash investment. Option Strategies.
Covered Call – Sell call on owned asset. In return for call premium, upside potential is foregone. Protective Put – Buy a put option on asset. If hedged asset declines in value, put increases in value. Loss is limited to put premium.
Bull Spread – Buy low strike call and sell high strike call; profit if stock price rises. Bear Spread – Short bull spread: buy high strike call and short low strike call.
CFA13-L3-QS.indd 2 bull call spread box spread bear put spread RF ) Synthetic Equity Index from T-Bills long put long call XL XH ST Interest Rate Options. Call: Used to limit the cost of borrowing. If rates rise, call pays off, reducing effective loan rate. Payoff = (NP)max(0, LIBOR – strike rate)(D / 360). Put: Used to maintain the return on an asset (e.g., floating rate loan). If rates fall, the option pays off.
Payoff = (NP)max(0, strike rate – LIBOR)(D/360). Cap: Series of calls (caplets). Floor: Series of puts (floorlets).
Interest Rate Collar: Combination of a put and call, usually a long put and short call. Profit and loss from interest rate movements are constrained. Plain Vanilla Interest Rate Swap: Company X agrees to pay Company Y a periodic fixed rate on a notional principal.
Company Y agrees to pay Company X a periodic floating rate on the same NP. Change Portfolio Duration with Swaps MDPay Floating = MDFixed − MDFloating 0 MDPay Fixed = MDFloating − MDFixed Tax Rate. Investment horizon ↑, tax drag ↑. Investment return ↑, tax drag ↑ Tax-deferred Accounts: Front-end benefits: contrib. Current taxes, accrue tax free, taxed in future. FVIFTDA = (1 + R )N (1 − TN ) Tax-exempt accounts: Back-end benefits. Made after-tax, accrue tax free, tax-free in future.
Schweser Cfa Level 2 Quicksheet Pdf
FVIFTEA = (1 + R )N continued on next page. 10/3/2012 4:28:40 PM.