Fixed Income Portfolio

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• Fixed Income Portfolio
• Management Derivatives and Risk Measurement
  and Control

FOW 2003 Derivatives and Risk Expo
Anthony R. Jiorle May 20, 2003
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Fixed Income Portfolio Management

• Benchmarks
• In Search of Value
• Duration
• Implementation Tactics
• Risk Measurement and Control
• Performance Attribution

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Benchmarks

• Third Party
• Custom

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In Search of Value

• Quantitative Research
• Fundamental Credit Research

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In Search of ValueQuantitative Research

• Mean Reverting Relationships
• Line Graphs
• Histograms
• Excess Return Graphs
• Quantitative Credit Analysis
• Proprietary variation of the Merton Model
• KMV Model

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Mean Reverting Relationships

• Asset Types
• Sector Spreads
• Quality Spreads
• Treasury and Swaps Curves
• Volatility

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Asset Types

• Treasuries
• Agencies
• Corporate
• Mortgages
• Asset-backs
• Swaps and Other Derivatives

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Asset Types - Derivatives

• Treasury Futures
• Index Total Rate of Return Swaps
• Corporate Bond Indices
• MBS Indices
• MBS Coupons
• CMBS Indices
• Fixed for Floating Swaps

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Sector Spreads

• Industrial
• Finance
• Bank
• Telecom
• Utility Electric
• Utility Other
• Supranational
• Yankee

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Sector Spreads - Derivatives

• By Floaters and Swap for Fixed
• Credit Default Swaps

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Quality Spreads

• Treasury
• Agency
• Aaa
• Aa
• A
• Baa

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Quality Spreads - Derivatives

• Total Rate of Return Swaps
• Fixed for Floating Swaps
• Credit Default Swaps
• Baa Index
• High Yield Index

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Treasury and Swaps Curves

• 2s to 5s, 10s, or 30s
• 5s to 10s, or 30s
• 10s to 30s

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Treasury and Swaps Curves - Derivatives

• Treasury Futures
• Treasury Options
• Options on Treasury Futures
• Fixed for Floating Swaps
• Swaptions

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Volatility

• Rich or Cheap
• Basis Point Volatility
• Callable vs. Non-callable Bonds
• Mortgage-backed Securities

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Volatility - Derivatives

• Swaptions
• Options on Treasuries
• Options on Treasury Futures

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Fundamental Credit Research

• Taxable
• Issuers
• Sectors
• Structured Products

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Fundamental Credit Research

• Municipal
• Issuers
• Sectors
• Regions / States
• Structured Products

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Duration

• Fundamental Economic Analysis
• Fed Policy Outlook
• Interest Rate Trend Analysis
• Forward Rate Analysis

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Duration - Derivatives

• Treasury Futures
• Fixed for Floating Swaps
• Hedge with Out-of-the-money Options or Swaptions

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Implementation Tactics

• Average in
• Average out

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Risk Measurement and Control

• Issuer Exposure
• Relative Duration Contribution vs. Benchmark
• Convexity
• Estimated Tracking Error

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Issuer Exposure

• Credit Analysts Approval
• Analysts Rating vs. Agency Rating
• Issuer Position Limits
• Credit Quality Rating
• Maturity

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Relative Duration Contribution vs. Benchmark

• Asset Type
• Sector
• Quality
• Curve

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Risk Measurement and Control Benchmark
Comparison Reports

• Effective Duration Buckets
• S
• e
• c Effective Duration Contribution
• t Difference from Benchmark
• o
• r

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Relative Convexity

• Volatility
• Callable Bonds
• Mortgage-backed Securities
• Derivatives

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Risk Measurement and Control Benchmark
Comparison Reports

• Effective Duration Buckets
• S
• e
• c Convexity Contribution
• t Difference from Benchmark
• o
• r

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Estimated Tracking Error

• Magnitude
• Source
• Covariance

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Risk Measurement and Control Summary
Characteristics
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Risk Measurement and Control Duration
Contribution
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Risk Measurement and Control Decomposition of
Variance
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Risk Measurement and Control Decomposition of
Variance cont.
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Risk Measurement and Control- Decompostion of
Variance cont.

• Risk Measurement Risk Summary
• Monthly Annual
• Stand. Dev. Stand. Dev.
• Total Tracking Error 0.13 0.44
• Market Tracking Error 0.12 0.43
• Total Portfolio Risk 0.91 3.14
• Total Benchmark Risk 0.87 3.01
• Market Sensitivity (Beta) 1.03

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Performance Attribution

• Performance Relative to Benchmark
• Sources of Performance Difference
• Payoff from Intentional Differences from
  Benchmark
• Payoff from Unintentional Differences from
  Benchmark

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End Results -Intermediate Term Bond Trust vs.
Lehman Intermediate Aggregate Index
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