fixed income portfolio management final presentation
Post on 25-Jan-2017
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Maturity
Distribution of Investments by Country
Distribution by Industry
Initial Portfolio Set-Up Company Name Notional CUSIP/S
AMAZON.COM INC $25,000,000.00 023135AH9
AMERICAN AIRLINES GROUP $10,000,000.00 02376RAB8
AT&T INC $10,000,000.00 00206RAW2
BARCLAYS BANK PLC $25,000,000.00 06739FGF2
BLACKROCK INC $45,000,000.0009247XAL5/09247XAE1
BOEING CO $25,000,000.00 097023AW5
CANADA GOVERNMENT $20,000,000.00 135087 E42
CISCO SYSTEMS INC $25,000,000.00 17275RAE2
EXXON MOBIL CORPORATION $25,000,000.00 30231GAL6
GENERAL ELECTRIC CO $20,000,000.00 369604BD4
JOHNSON & JOHNSON $20,000,000.00 478160AU8
JPN BANK FOR INT'L COOP $25,000,000.00 471048AP3
KFW $25,000,000.00 UV4264304
KINGDOM OF SPAIN $10,000,000.00 EJ5656909
LLOYDS BANK PLC $25,000,000.00 53944VAD1
MITSUBISHI UFJ LEASE&FIN $25,000,000.00 EK7440416
PROVINCE OF ALBERTA $10,000,000.00 01306GAB9
SVENSKA HANDELSBANKEN AB $25,000,000.00 86960BAA0
TOTAL CAPITAL INTL SA $25,000,000.00 89153VAL3
TOYOTA MOTOR CREDIT CORP $10,000,000.00 89236TCP8
TREASURY BILL $20,000,000.00912796FV6/912796HA0
UBS AG STAMFORD CT $20,000,000.00 90261XHK1
Distribution by Industry & Sector
Portfolio LimitsCompany Name Notional ($million) Rating Type
AMAZON.COM INC 25 AA- CorporateAMERICAN AIRLINES GROUP 10 B+ CorporateAT&T INC 10 BBB+ CorporateBARCLAYS BANK PLC 25 A- FinancialBLACKROCK INC 45 AA- FinancialBOEING CO 25 A CorporateCANADA GOVERNMENT 20 AAA GovernmentCISCO SYSTEMS INC 25 AA- CorporateEXXON MOBIL CORPORATION 25 AAA CorporateGENERAL ELECTRIC CO 20 AA+ CorporateJOHNSON & JOHNSON 20 AAA CorporateJPN BANK FOR INT'L COOP 25 A+ GovernmentKFW 25 AAA FinancialKINGDOM OF SPAIN 10 BBB GovernmentLLOYDS BANK PLC 25 A FinancialMITSUBISHI UFJ LEASE&FIN 25 A CorporatePROVINCE OF ALBERTA 10 AAA GovernmentSVENSKA HANDELSBANKEN AB 25 AA- FinancialTOTAL CAPITAL INTL SA 25 AA- CorporateTOYOTA MOTOR CREDIT CORP 10 AA- CorporateTREASURY BILL 20 AAA GovernmentUBS AG STAMFORD CT 20 A Financial
USIN
G THE PITCHBOO
K TEMPLATE
Rebalance 1
Locked in profit/loss
Action Taken ReasonsGoing to sell Lloyds Bank PLC Looking at the sector pie chart shows we have too high of an exposure to the financial sector.
Going to sell KFW For the same reasons as Lloyds but also to lock in a large profit.
Going to buy Coca-cola (same notional as Lloyds) More diversification and good rating (AA – keeps us within the limits)
Going to buy Walt Disney (same notional as KFW) Diversification (previously had no bonds in the media sector) and credible company (A)
Going to short two (long maturity) treasuries Create a (somewhat unbalanced) steepener position with previously bought T-bills in expectation that the FED will not raise rates.Hedge against interest rate risk.
Action Notional Locked in profit/loss
Previoust Funds $30,000,000 0
Sold Lloyds $10,000,000 $31,078.66
Sold KFW $10,000,000 $319,840.28
Bought Coca-cola -$10,000,000 $0
Bought Walt Disney -$10,000,000 $0
Shorted 2 treasuries $100,000,000 $0
Total $30,000,000 (or $130,000,000 with treasuries)
$350,918.94
Distribution by Industry
Duration, DV01 and Convexity
Limit Check
Company Name Notiona
l
Rating Type
AMAZON.COM INC 25000000 AA- Corporate
AMERICAN AIRLINES GROUP 10000000 B+ CorporateAT&T INC 10000000 BBB+ CorporateBARCLAYS BANK PLC 25000000 A- FinancialBLACKROCK INC 20000000 AA- FinancialBLACKROCK INC 25000000 AA- FinancialBOEING CO 25000000 A Corporate
CANADA GOVERNMENT 20000000 AAA GovernmentCISCO SYSTEMS INC 25000000 AA- CorporateCOCA-COLA CO/THE 25000000 AA CorporateEXXON MOBIL CORPORATION 25000000 AAA CorporateGENERAL ELECTRIC CO 20000000 AA+ CorporateJOHNSON & JOHNSON 20000000 AAA Corporate
JPN BANK FOR INT'L COOP 25000000 A+ GovernmentKINGDOM OF SPAIN 10000000 BBB+ Government
MITSUBISHI UFJ LEASE&FIN 25000000 A FinancialPROVINCE OF ALBERTA 10000000 AAA GovernmentSVENSKA HANDELSBANKEN AB 25000000 AA- FinancialTOTAL CAPITAL INTL SA 25000000 AA- CorporateTOYOTA MOTOR CREDIT CORP 10000000 AA- CorporateTREASURY BILL 10000000 - GovernmentTREASURY BILL 10000000 - GovernmentUBS AG STAMFORD CT 20000000 A Financial
WALT DISNEY COMPANY/THE 25000000 A Corporate
Here we can see that the DV01 (including the shorted treasuries) is within the 100,000 limit. However, $94,727.22 is still too high – we are exposed to a movement of almost $100,000 for each basis point change in the yield. It is also dangerous to be this close since the DV01s could shift week-by-week and go over the limit. This, therefore, needs to be hedged. The weighted average convexity is 0.2172 which is arguably negligible – without the shorted treasuries the weighted average convexity ~ 0.6 which would potentially need to be hedged because of the systematic risk exposure.
USIN
G THE PITCHBOO
K TEMPLATE
Rebalance 2
Locked in profit/loss
Action Taken ReasonsGoing to sell Blackrock ‘09247XAL5’ I am still heavily weighted in the financial sector so I should sell more banks (and I have double Blackrock)
Going to sell JPN Bank JPN bank has very long maturity so I am selling it to reduce the DV01.
Going to sell Boeing I am predicting the oil market’s decline to have a negative effect on Boeing and the energy sector.
Going to sell Total Capital ‘89153VAL3’ Same reason as above.
Action Notional Locked in profit/loss
Previous Funds $30,000,000 $350,918.94
Sold Blackrock $20,000,000 $182,693.55
Sold JPN bank $25,000,000 $54,387.10
Sold Boeing $25,000,000 $108,879.03
Sold Total Capital $25,000,000 $307,643.15
Total $125,000,000 (or $225,000,000 with treasuries)
$1,004,521.77
Distribution by Maturity
2016 2017 2018 2019 2020 2021 20220
20000000
40000000
60000000
80000000
100000000
120000000
USSZSWSPJNENCA
DV01 after selling all these long-maturity bonds falls drastically down to ~30,000
Current amount invested: $375MM
Hedges (since inception) on P&L 5
Hedges Details DV01/CS01 Total DV01 (with bonds) (should be almost 0)
P&L P&L + bonds
Swap 1 Pay fixed 5 year, 50MM notional -23,873 -93,161.05
Swap 2 Pay fixed 3 year 30MM notional -8,933 -4,976 -42,246.29 1,631,301
5-year T-note futures Short 25MM FVZ5 (250 contracts) -12,376 202,148
10-year T-note futures Short 12MM TYZ5 (120 contracts) -9,635 5,818 137,813 2,106,669
Eurodollars Basket futures up to EDZ8 -30,319.14 2,319.14 144,946 1,911,654.31
Hedges (since inception) on Final P&L
Hedges Details DV01 Total DV01 (with bonds) P&L P&L + bonds
Swap 1 Pay fixed 5 year, 50MM notional -24,819.41 992,642
Swap 2 Pay fixed 3 year 30MM notional -5,842.01 -5,426.24 -1,408 1,914,095
5-year T-note futures Short 25MM FVZ5 (250 contracts) -12,350 81,055
10-year T-note futures Short 12MM TYZ5 (120 contracts) -9,340 3,535 27,188 1,028,288
Eurodollars Basket futures up to EDZ8 -33,647 -8,412 -236,290 683,255.49
FINAL AN
ALYSISHedges Final P&LHedges Summary
• Swaps performed the best (could have made almost $3MM if I had hedged with swaps since inception)
• Eurodollar Futures performed the worst.
• Treasury futures had a marginally positive profit.
Evaluation
No extra
hedge
sSw
aps
Futures
Eurodollar
s
(with
out shorting t
reasurie
s)
-2000000.00
-1000000.00
0.00
1000000.00
2000000.00
3000000.00
4000000.00
Total Mark-to-Market
Accrual and Locked-In Profits
Total
$ m
illio
ns
What would I have done differently?- Allocate bonds less haphazardly. - Lock-in the profits of my shorted treasuries and open up the opposite position
(flattener) in anticipation of the Fed raising rates.
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