Level III Derivatives

Access to all Level III derivatives articles until the next Level III exam date

Adjusting the Value of an Equity Portfolio The typical formula for computing the number of equity futures contracts needed to adjust the value of an equity portfolio is: \[N_f\ =\ \frac{V_T\ -\ V_P}{V_f}\left(\frac{\beta_P}{\beta_f}\right)\] where: \(N_f\): number of equity futures contracts to buy (i.e., take the long position) or sell (i.e., take the short position) \(V_T\): […]

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Dollar duration (or money duration) is a phrase that should be familiar to you by now: instead of measuring the percentage change in the value of a fixed income portfolio for a 1% change in yield to maturity (as modified or effective duration do), dollar duration measures the change in dollar (or other currency) value […]

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Many applications of derivatives – forwards and futures in particular – in risk management boil down to getting from here to there: temporarily changing (adjusting) the: Value of an equity portfolio Beta of an equity portfolio Value of a fixed income portfolio Duration of a fixed income portfolio Allocation of an equity/fixed income portfolio There are formulae […]

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