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PowerPoint Pr sentation Currency Risk

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					Fixed Income Securities
          and
    Bond Portfolios
Alexander Giuliani
Corporate Bond Portfolio Manager

- Magister iuris (University of Vienna, School of Law)
- Masters in Finance (London Business School)
Asset Classes and Volumes
              60,000


                                                       50,147
              50,000



              40,000
USD billion




              30,000


                                   19,528
              20,000



              10,000



                  0
                       Total Equity Market   Total Bond Market
              25,000
                                          23,998




              20,000
                                                                                                           19,265




              15,000
USD billion




              10,000



                                                                             6,376
               5,000




                  0
                       Bonds issued by Financial Institutions   Bonds issued by Corporates   Bonds issued by Governments
              160,000                                                             155,731


              140,000


              120,000


              100,000
USD billion




               80,000


               60,000
                                                       50,147

               40,000


               20,000             19,528



                   0
                        Total Equity Market   Total Bond Market   Total Interest Rate Derivatives
                                                       OTC Derivatives



              140,000


              120,000                      121,799



              100,000


               80,000
USD billion




               60,000


               40,000


                             22,088                                                     21,952
               20,000
                                                                 2,799
                                                                               1,040
                   0
                        FX Contracts   Interest Rate      Equity Linked   Commodity    Other
                                         Contracts         Contracts       Contracts
                                                  OTC Interest Rate Derivatives




              100,000
                                                                 94,583
               90,000

               80,000

               70,000

               60,000
USD billion




               50,000

               40,000

               30,000

               20,000                                                                 16,946
                                    10,271
               10,000

                   0
                        Forward Rate Agreements              Swaps                Options
                                 Exchange Traded Futures


14,000
                    13,132

12,000



10,000



 8,000



 6,000



 4,000



 2,000
                                                                         502
                                                   80

    0
         Interest Rate Futures         Currency Futures    Equity Index Futures
                                 Exchange Traded Options


25,000



                    20,801
20,000




15,000




10,000




 5,000

                                                                     2,198
                                                   38

    0
         Interest Rate Options         Currency Options   Equity Index Options
   Drivers & Risks
          of
Fixed Income Markets
1. Interest Rate Risk
2. Credit Spread Risk
                                               EURO
              350
                                                               Gesamt   AAA
              300                                              AA       A
                                                               BBB
              250
Basispunkte




              200

              150

              100

               50

               0
               Jän 01   Jul 01   Feb 02   Aug 02      Mär 03   Okt 03   Apr 04   Nov 04
3. Credit Default Risk
12.00%                                             High Yields                  All Ratings                  Investment Grades


10.00%




8.00%




6.00%




4.00%




2.00%




0.00%
         1981   1982   1983   1984   1985   1986    1987   1988   1989   1990    1991   1992   1993   1994    1995   1996   1997   1998   1999   2000   2001   2002   2003
                                                                          Investment Grades

0.60%




0.50%




0.40%




0.30%




0.20%




0.10%




0.00%
        1981   1982   1983   1984   1985   1986   1987   1988   1989   1990   1991    1992    1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003
Risk Controlling
1. Duration and Convexity
                  Price/Yield Relationship

                   Price/Yield Curve

                                            Convexity =
                                            Change in Slope of Price/Yield Curve


        Current
                                                     Duration =
Price




        Price
                                                     Slope of Price/Yield Curve

                        Current Yield


                                        Yield
                  T
Bond Pr ice P   Ct e  yt
                  t 1

                       P          T
First Derivativeof P :
                       y
                                  t Ct e  yt
                                  t 1

                          2P            T
Second Derivativeof P :
                          y 2
                                         t Ce
                                         t 1
                                                2    yt



                     P 1
Dollar Delta  $  
                     y 100
                      P 1
Macaulay Duration 
                       y P
                                       1
Change in P  [ $ (change in y )]  [  (change in y ) 2 ]
                                       2
                               Calcuation of Duration and Convexity

                                    Deutsche Telekom 6.625% 29/03/2018


YTM                             5,247%       Date      Days     Years    Cash Flows     PVs     Time Weighted Time^2 Weighted
Market Price ("Clean Price")     113,45   15.03.2004        0     0,0000    119,7700   119,7700         0,0000          0,0000
Accrued Interest                   6,32   29.03.2004       14     0,0384      6,6250     6,6120         0,2536          0,0097
Total Price ("Dirty Price")      119,77   29.03.2005      379     1,0384      6,6250     6,2824         6,5233          6,7736
Dollar Duration                   11,18   29.03.2006      744     2,0384      6,6250     5,9692        12,1673         24,8013
Macaulay Duration                 9,335   29.03.2007     1109     3,0384      6,6250     5,6716        17,2323         52,3579
Convexity                          1,36   29.03.2008     1475     4,0411      6,6250     5,3881        21,7738         87,9898
Price Change                     -10,50   29.03.2009     1840     5,0411      6,6250     5,1195        25,8077        130,0991
                                          29.03.2010     2205     6,0411      6,6250     4,8642        29,3853        177,5196
                                          29.03.2011     2570     7,0411      6,6250     4,6217        32,5421        229,1319
                                          29.03.2012     2936     8,0438      6,6250     4,3907        35,3181        284,0932
                                          29.03.2013     3301     9,0438      6,6250     4,1718        37,7292        341,2166
                                          29.03.2014     3666    10,0438      6,6250     3,9638        39,8121        399,8658
                                          29.03.2015     4031    11,0438      6,6250     3,7662        41,5935        459,3516
                                          29.03.2016     4397    12,0466      6,6250     3,5780        43,1021        519,2326
                                          29.03.2017     4762    13,0466      6,6250     3,3996        44,3529        578,6528
                                          29.03.2018     5127    14,0466    106,6625    52,0045       730,4856      10260,8203
    2. Credit Analysis
a) Fundamental Research
b) Quantitative Models
KMV CreditEdge
KMV‘s methodology is based on option pricing theory by Robert C.
Merton*, who found that both a firm‘s debt and equity can be viewed as
options on the value of its assets.
Based on Merton‘s research, KMV has developed a model that calculates a
firm‘s Expected Default Frequency („EDF“ = default probability) by using:

- Balance sheet structure (financial leverage)
- Stock price volatility
- Volatility of assets
- Proprietary database of historical default data, which maps
  a firm‘s dinstance to default to a default probability


* Robert C. Merton: „On the Pricing of Corporate Debt: The Risk Structure of Interest Rates“, Journal of Finance, 1974
WorldCom: EDF and Bond-Spread
Daily control of EDF values for both individual securities
                  and whole portfolios
Bond Analysis in Practice
Risk/Return Characteristics
            of
   Bond Asset Classes
50%
40%
30%
20%
10%                                                                                 1J Min
 0%                                                                                 1J Max
-10%                                                                                1J Mittel
-20%
-30%
-40%
       Bünde in JPM Global JPM EMBI      US       US High      US       Mortgage
         DM     Govt Bond GD ges. in Corporate     Yield    Treasury     Master
                ges. in DM   DM      Master ges. Master II Master ges. Index ges.
                                       in DM     ges. in DM  in DM       in DM
35%
30%
25%
20%
15%
                                                                                    2J Min
10%
                                                                                    2J Max
 5%
                                                                                    2J Mittel
 0%
-5%
-10%
       Bünde in JPM Global JPM EMBI      US       US High      US       Mortgage
         DM     Govt Bond GD ges. in Corporate     Yield    Treasury     Master
                ges. in DM   DM      Master ges. Master II Master ges. Index ges.
                                       in DM     ges. in DM  in DM       in DM
30%
25%
20%
15%                                                                                 3J Min

10%                                                                                 3J Max

 5%                                                                                 3J Mittel

 0%
-5%
-10%
       Bünde in JPM Global JPM EMBI      US       US High      US       Mortgage
         DM     Govt Bond GD ges. in Corporate     Yield    Treasury     Master
                ges. in DM   DM      Master ges. Master II Master ges. Index ges.
                                       in DM     ges. in DM  in DM       in DM
25%

20%

15%                                                                                           5J Min

                                                                                              5J Max
10%
                                                                                              5J Mittel

5%

0%

-5%
      Bünde in DM JPM Global   JPM EMBI US Corporate US High        US Treasury Mortgage
                  Govt Bond    GD ges. in Master ges. Yield Master Master ges. Master Index
                  ges. in DM      DM        in DM     II ges. in DM    in DM    ges. in DM
         11.0%

         10.0%
                    EMU Corporates 65,3%
                    EMBI GD 34,7%
         9.0%
                    EMBI GD 32,3%
                                                                                  EMBI GD 100%
Return




         8.0%
                                                           EMU Corporates 36,3%
         7.0%                                              EMBI GD 63,7%
                                                           EMBI GD 32,3%
                            EMU Corporates 83,9%
         6.0%               Global Govies 14,4%
                            EMBI GD 1,6%

         5.0%
             2.0%   4.0%      6.0%         8.0%    10.0%   12.0%    14.0%     16.0%   18.0%      20.0%
                                                      Risiko
         12.0%
                                                          EMBI GD 100%
         11.0%
                    Bünde 62,9%
         10.0%      EMBI GD 37,1%

         9.0%
Return




         8.0%
                                                                Bünde 38,4%
                                                                EMBI GD 61,6%
         7.0%                  Bünde 93,7%
                               US High Yield 4,2%
         6.0%                  US Mortgages 2,1%

         5.0%
             2.5%      5.0%         7.5%      10.0%   12.5%     15.0%     17.5%   20.0%   22.5%
                                                      Risiko
         9.5%
                                                                EMBI GD 100%
         9.0%
                    Bünde 51,9%
         8.5%       EMBI GD 28,7%
                    Gl. Govies 19,4%
         8.0%
Return




         7.5%
                                                                   Bünde 42,8%
         7.0%                                                      EMBI GD 57,2%
                                  Bünde 49,1%
         6.5%                     US Mortgages 45,1%
                                  EMBI GD 3,3%
         6.0%                     US High Yield 1,5%
         5.5%
             2.0%         4.0%           6.0%          8.0%         10.0%          12.0%   14.0%
                                                       Risiko
         9.0%

         8.8%   Bünde 8,1%
                US High Yield 14,4%
         8.6%   US Mortgages 77,6%
                                                                    US Corporates 100%
         8.4%
Return




         8.2%

         8.0%                                       US Corporates 30,8%
                                                    US High Yield 17,1%
         7.8%                                       US Mortgages 52,2%
                               Bünde 56,6%
         7.6%                  US High Yield 5,1%
                               US Mortgages 38,4%
         7.4%
            2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00%
                                        Risiko
Bond Products
       of
Erste Sparinvest
Funds with No Credit Risk:
      - Euro-Land Government Bond Funds
      - US Government Bond Funds
      - International Government Bond Funds
      - US Mortgages

Funds with Credit Risk:
      - Investment Grade Corporate Bond Funds
      - High-Yield Corporate Bond Funds
      - Emerging Market Government Bond Funds
CASH CORPORATE PLUS
MONEY MARKET FUND WITH CORPORATE BONDS
                  Objective & Strategy
Objective
The ESPA Cash Corporate Plus is a money-market mutual fund consisting of EUR- und
USD-denominated corporate bonds. Its objective is to generate a return over EURIBOR.
The fund is structured for investors with a 1 to 1½ year investment horizon, who want to
benefit from higher returns of corporate bonds (relative to government bonds). The fund
is relatively immune against short-term fluctuations in interest rates and has low credit
risk.

Strategy
The Cash Corporate Plus buys two kinds of investment-grade rated corporate bonds:
• Floating rate bonds and
• Fixed coupon bonds with short maturity.
The duration of the fund is reduced to a level of approx. 0.30 years by using derivatives.
The fund has no currency risk.
                            Fund Data
Fund Currency            EUR                     WKN:
Volume                   42 Mio.                 Accumulator: 067683
Bonds                    170                     Distributor:067684
Average Maturity         4.73 years              NAV:
Average Coupon3.51%                      Accumulator: € 99.70.-
Average Credit Quality   A3                      Distributor: € 102.30.-
Duration                 0.33 years              Performance (p.a. %)
Yield to Maturity        3m EURIBOR + 50bp       2002 (since June)0.49
Launch Date              10 June 2002            2003 (FY)          2.41
Fiscal Year              1 March – 28/29 Feb.    2004 (YTD)         0.23
                                                 since launch:      1.98
Data per 11.2.2004
                     Risks & Mitigants
Credit Risk:
We use KMV CreditEdge, a software program based on option pricing theory, to
quantify default risk of the corporate bond issuers.
Interest Rate & Credit Spread Risk:
The coupon of the floating rate notes is determined quarterly, which results in a
low duration of roughly 0.125 years. The duration of the fixed coupon bonds is
reduced by using Swapnote-Futures so as to get a target duration of 0.3 years. As
a consequence, the fund is relatively immune against fluctuations in interest rates
but it reacts to changes in the spread-differential of Swaps and Credits. A
tightening of that differential would have a positive effect, whereas a widening
would have a negative impact.
Currency Risk
The Cash Corporate Plus fund invests only in EUR- und USD-denominated bonds.
The USD-denominated share of the fund (29 % per 11.2.2004) is entirely hedged
into EUR with currency forward contracts (monthly currency forward „roll over“).
Therefore, there is no currency risk from the perspective of a EUR-investor.
                  Rating-Distribution
The Cash Corporate Plus invests primarily in subordinated bank capital of
issuers with excellent credit standing, which have a senior debt rating in the
„AA“ area. The admixture of bonds issued by telecoms and industrials is
beneficial for both diversification and yield of the portfolio. The average rating
of the fund is „-A“.

                                        AAA
                                                AA
                                         2%
                                                8%


                          BBB
                          40%
                                                A
                                               50%
              Industry-Distribution
Bonds issued by financial institutions account for 60% of the fund‘s assets,
since those companies are the main issuers of floating rate bonds. Apart
from a 14% stake in media and telecoms, there is no other industry sector
concentration in excess of 4%.


                           OTHER
                            25%
                                                   BANKS
                                                    45%
         MEDIA & TELECOM
               14%               DIVERSIFIED
                             FINANCIAL SERVICES
                                     16%
Floaters & Fixed Coupon Bonds

               Fixed Coupon
                Duration>2J
                    17%




Fixed Coupon                  Floating Rate Notes
 Duration<2J                          67%
     16%
        Performance vs. 3m-Libor
            Rechenwerte 02.01.2003 - 10.02.2004 (Basis 100) mit Reinvestition
104.0

103.5

103.0

102.5                                                                       CASH
                                                                            CORP.-PLUS A
102.0

101.5

101.0                                                                       BM ESPA
                                                                            CaCorpPl -1D
100.5

100.0

 99.5
   01/03 02/03 04/03 06/03 08/03 10/03 12/03
       01/03 03/03 05/03 07/03 09/03 11/03 01/04