Quiz Question FI

Got it. thanks :slight_smile: 1morelevel Wrote: ------------------------------------------------------- > Rustyrudder - you divide by net equity, assets - > liabilities. > > Typo. How do i fix it? > > Level3aspirant - its a typo… i was transcribing > from sloppy notes. Not sure how to fix it…

Captain Barbosa Wrote: ------------------------------------------------------- > Correct answer is C) 10.97 > > Solution: > > COV of bonds = -5.1*.01*40000000 > COV of debt = -.070*.01*17000000 > COV of futures=-6.2*.01*8000000 > > Total Cov =2040000+11900+496000=2524100 > > Using $(delta value)= - ED * .01 * > (40000000-17000000)=2524100 What is COV ? > > Hence ED=10.97

Hi, A few questions C. Leverage adjusted duration Duration equity (Equity) = Duration assets (assetts) - duration liablilities (liabililities) Duration equity (17MM) = 40MM (5.1) + 8MM(6.2) - 17(.07) solve duration equity = 10.97 ==> How are you getting 10.97 here? Don’t know why the arithmetic isn’t working for me. Unless you mean 23MM for equity, which I believe it is. for 100 bps = 10.97 Alternatively, you could find the equity duration of the portfolio first, and then factor in the futures. It doesnt matter the order. Of you did it that way: Duration equity (Equity) = Duration assets (assetts) - duration liablilities (liabililities) Duration equity (17MM) = 40MM (5.1) - 17(.07) Solve for equity duration and you get 8.81. ==> Same issue here. Equity should be 23MM I think. Then lever up the futures: Equity (equity duration) + futures notional (futures duration) / equity 23MM x 8.81 + 8MM x 6.2 = 252.33/ 23MM = 10.97…same answer You dont adjust in the denominator for the future (ie value of equity) because the future is assumed to have a negligible equity (small margin amount).

2040000+11900+496000 = 2547900 and not 2524100 (or My MS Excel is wrong…) And takes me to a duration of 10.5. I can’t reproduce 10.97…what’s going on? Captain Barbosa Wrote: ------------------------------------------------------- > Correct answer is C) 10.97 > > Solution: > > COV of bonds = -5.1*.01*40000000 > COV of debt = -.070*.01*17000000 > COV of futures=-6.2*.01*8000000 > > Total Cov =2040000+11900+496000=2524100 > > Using $(delta value)= - ED * .01 * > (40000000-17000000)=2524100 > > Hence ED=10.97

Where is this question from? and please post their guideline answer (if there is more than you gave)

i dont get the way everyone is attempting this… too much confusion, we need the guideline answer. Looking at it tho, here were my thoughts: Duration of leveraged portfolio = [(Duration assets*total assets)-(Duration liab*total liab)] / Equity -its a formula straight out of the book about calc leveraged dur. total assets = 48M (40M AUM + 8M futures) Duration of assets = 5.283 -> .8333(5.1) + .1666(6.2) = 4.25+1.033 (the .8333 is the weight of AUM(40M), .1666 is weight of futures (8M)) total liab = 17M Duration of liab = .07 total equity = 23M (40-17) So in the formula you have: (5.283*48M) - (.07*17M) / 23M = 10.974 I think many of us are doing very similar things to come up with the same answer.

Nevermind, I was just confused that the 8M futures was a later purchase and couldn’t figure out how it was funded.

thanks. know i know it. mark: You dont adjust in the denominator for the future (ie value of equity) because the future is assumed to have a negligible equity (small margin amount).

Thanks for that. I incorrectly had the debt beta at 0.7 instead of 0.07. Without picking up on this discrepancy I saw someone else who’d made the same mistake, and assumed there was something bigger amiss. But there wasn’t - it was just me. Thanks for your help! APP.

Thank you guys, this is all so helpful! =) I love it when people approach the same problem in various ways… it helps to better understand the topic…

1morelevel Wrote: ------------------------------------------------------- > You dont adjust in the denominator for the future > (ie value of equity) because the future is assumed > to have a negligible equity (small margin amount). Can you refer me to the book where it states that? To me, Asset = 40+8=48; Liability = 17 --> equity = 31. My answer was 8.15.