Blog Archive

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• Bill of lading [products] 25 Jul 2010

  AIM:  Define “bill of lading” The document that represents the ownership of the good is called a bill of lading. It is issued either by the captain of the transportation ship or by the transporter in charge. That transportation contract may eventually be traded. It can … read more

• Week in risk (7/24/2010) 24 Jul 2010

  Stress test results at CEBS - 2010 EU WIDE STRESS TESTING. I found this BBC helpful article helpful: BBC News - Q&A: What are the European bank stress tests for? The Information Value of the Stress Test and Bank Opacity (New York Fed on the … read more

• Strip and stack hedge [products] 24 Jul 2010

  AIM:  Evaluate the differences between a strip hedge and a stack hedge and analyze how these differences impact risk management A strip hedge is when we hedge a stream of obligations by offsetting each individual obligation with a futures contract that matches the maturity and quantity … read more

• Basis risk [products] 24 Jul 2010

  AIM:  Explain how basis risk can occur when hedging commodity price exposure The basis is the difference between the price of the futures contract and the spot price of the underlying asset. Basis risk is the risk (to the hedger) created by the uncertainty in the … read more

• Weighted average cost of capital, WACC [video] 23 Jul 2010

  WACC is a marginal cost because we can’t assume it applies as the leverage increases. As leverage increases, the “cost of financial distress” (Stulz’ term) increases the financing costs. Video: Your browser cannot play this video. Learn how to fix this. read more

• Arbitrage Pricing Theory (APT) L1.T1.34 [practice, foundation] 23 Jul 2010

  AIM: Define and describe the components of the Arbitrage Pricing Theory (APT) model 34.1 Which component is NOT in the APT model (assigned Grinold)? a. Factor exposure b. Factor return c. Factor correlations d. Specific (idiosyncratic) return 34.2 Is each of the following statements about … read more

• Key rate hedge L2.T5.24 [practice, market] 23 Jul 2010

    AIM: Describe the key rate exposure technique in multifactor hedging applications and discuss its advantages and disadvantages. Questions: 34.1 Assume a portfolio with five (5) key rate exposures: 2-year, 5-year, 10-year, 20-year and 30-year. If our hedge portfolio consists entirely of zero-coupon bonds, how many … read more

• Commodity spread [products] 23 Jul 2010

  AIM:  Define and compute a commodity spread If we can take a long position on one commodity that is an input (e.g., oil) into another commodity that is an output (e.g., gas or heating oil), then we can take a short position in the output commodity … read more

• Gold, corn, natural gas, and crude oil [products] 23 Jul 2010

  AIM:  Discuss factors that impact gold, corn, natural gas, and crude oil futures prices Gold is durable with low storage costs. The forward price tends to be a gradually increasing function of maturity; this implies a lease rate. Exposure to gold can be achieved by ownership … read more

• Key rate ‘01 and key rate duration L2.T5.33 [practice, market] 22 Jul 2010

    AIM: Define, calculate, and interpret key rate 01 and key rate duration. Question: 33.1 Assume the initial value of a bond is $92,000 with the following values after key rate shifts: $92,003 @ 2-year shift $92,007 @ 5-year shift $92,015 @ 10-year shift $92,030 @ … read more

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