Archive for the ‘making money’ Category

Gain debt independence with secure financial control April 22nd, 2010

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If you scored low in this attribute, you probably tend to be a highly independent person.While this is a valuable trait in many cases, it can be destructive in a partnership. Have you ever worked on a project and had someone go off on a tangent, leaving the rest of the team lost and bewildered? Genius, of course, often requires independent thinking.

But in partnerships, success comes from planning with others and then performing according to plan. If you’re uncomfortable relying on others for your success, you’ll have a difficult time being in partnership with others. People who are highly independent also tend to have a low ability to trust and feel uncomfortable about selfdisclosure, feedback, and change they cannot exclusively control. If you ranked high in this attribute, you probably are comfortable being interdependent and working in partnership. You may also have a high ability to trust and comfort with self-disclosure and feedback.

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Sensitivity to parallel shifts of the credit curve November 17th, 2009

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While both strategies yield portfolios that have the same sensitivity to parallel shifts of the credit curve, they usually yield very different returns in real world scenarios. Not only will capital gains differ when the credit curve moves in a nonparallel way, but returns from carry differ also when the yield pickup from extending duration is not equal to the yield pickup from increasing the allocation to the sector. Of course, these presumptions are rarely met in reality. Increasing the allocation to a high beta sector like automotive usually generates more carry than extending duration. Therefore, over the long run, this strategy has proven more successful. The allocation strategy is also more intuitive with respect to the allocation of capital to different risk or spread classes.

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Credit curves of two issuers will converge November 15th, 2009

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If an investor only has a view that the credit curves of two issuers will converge, but is not sure whether this will happen at wider or tighter spread levels, he would like to construct the box trade in a way that makes it insensitive to parallel shifts of the credit curves. In order to achieve this goal the trade has to be proceeds neutral. It is worth noting that the spread-neutral box trade is almost independent of the spreads, except for the minor impact of spreads on duration.

Remember that this trade is designed to protect investors from spread changes that might adversely impact their credit curve trade. Yet, often portfolio managers not only have a view on the relative changes of the credit curve of the two issuers but also on the direction of spreads. In this case the spread-neutral box trade is not optimal. The investor would rather choose a longer or shorter duration, depending on his view on the direction of spreads.

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A bond swap on an issuer’s credit curve November 7th, 2009

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In most cases portfolio managers do not expect the spread change to occur that is priced in forward spreads. If this view is strong enough, and if the portfolio manager has proven his skill in predicting corporate bond spread changes, he may decide to bet against the market, in other words to take an active position with respect to the credit curve. Several different ways to implement such trades will be discussed subsequently.

The first trade is simply a bond swap on an issuer’s credit curve. If an investor expects the credit curve to flatten more than implied by forward spreads over the holding period, he may switch out of short-term bonds into longer maturities. In order to keep the duration exposure constant, a part of the proceeds of the sale of the short-term bonds would have to be kept in cash. Although this trade can be constructed to be duration-neutral, the performance over the holding period relative to the benchmark depends on changes of the shape of the yield curve. A yield curve steepening can lead to the underperformance of the long bonds even if the credit curve flattens.

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