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Study Session 10-11: Fixed-Income Portfolio Management

Fixed Income - over- and underhedging

Could someone please explain why the following two statements hold?

1. If the manager believes rates will increase, underhedge (<100%) and the losses on the contracts will be reduced, improving portfolio performance and increasing the surplus.

  • reduce the hedge size, leaving the BPV of assets less than of a fully hedged duration gap.

Leaving the BPV of assets at a lower level means they will decline less as interest rates rise. - Why?

Macaulay duration vs return

Hi guys, 

can anyone explain it? It’s from SchweserNotes Book 2, Capital Market Expectations.

Leveraged portfolio return

I don’t understand this referring to s note.

“Borrowing is normally done at shorter tern interest rate and those costs can increase faster than return on asset if interest rates increase. I.e. the asset duration normally exceeds the liability duration in a leveraged portfolio.”

Why normally asset duration exceeds liability duration ?

Correlation during recession

It seems strange. Does correlation decline between bond and other risky asset (equity) during recession according to this below s-note paragraph?

A particular problem is flight to
quality. During periods of market stress, all lower-quality and riskier assets may tend to
decline together (correlation approaching +1) as investors sell these assets and buy
high-quality developed-market government bonds for safety. Thus, correlation of these
government bonds to riskier assets declines during periods of stress and may be

Contingent Immunization


In FI mandates, I understand that Contingent Immunization(CI) assume that the ptf is actively managed as long as there is a surplus.

I read a set of notes including an example that said that when if manager expects interest rates to drop, they will reduce duration of ptf(w/o regard to duration of liability).

Now, under active management, Duration(ptf) does not have to match Duration(Liability); but why does the the manager look to increase duration of ptf on the back of expectation of interest rate drop?

2020 Reading 20 Example 4

This is a massive beast of an example; what is the essence we need to extract from this? I doubt we’re expected to regurgitate the process of completing this example on the exam…or do we?

I believe example 4 in 2019 curriculum is different question. 

fixed income

I am having problem understanding the logic behind EOC # 23: Rd 10.

Help! A simple duration question

May i ask why negative duration means increasing in value when interest rate “increases” but not “decrease”?