Derivatives and Risk Management

Derivatives and risk management

Part A

Portfolio Management

The purpose of this assignment is to invest £10,000,000 by forming a portfolio. Firstly? I have discussed the general investment trends and environments and than shown how I made portfolio and invested £10,000,000 in order to generate maximum profits. Asset allocation is based on the incontrovertible truth that a portfolio needs to be structured on the basis that no one can predict the future. A colleague of mine predicted that the S&P 500 would be up about 17% in 2009. He is now rationalizing his inaccuracy by blaming the sub-prime mess. "If it hadn't been for that? I probably would have been right."

Asset Allocation Strategy Utilizing Bonds

To begin with? investors should decide on a strategy for allocating their assets. My choice is to use bonds. This way we can identify the best manager for any particular category. Do not use index funds. Index funds are glorified traps in down markets. They are not actively managed? so no one is there to save the investor in down markets. There is an active manager that is superior to any index fund.

Relying on market incentives such as a Tobin tax represents a simple policy tool for lengthening the time horizon of international PI. It would provide new pools of finance that could be targeted to developing countries to compensate those harmed by financial instability and to finance long-term? real-sector development projects

Of all the criteria? risk is by far the hardest thing to figure out. While the market is going up I've heard people say they could lose 20% before they would worry. Those same people started to panic if their portfolio was down 10%. The amount of risk anyone can take tends to vary with market conditions? age and life experiences. It is usually safest to start with a portfolio that is more conservative than aggressive.

Structuring the Portfolio

The investor's portfolio should be structured with an asset allocation consistent with his benchmark. There are five basic asset classes that I recommend; stocks? bonds? cash? real estate and commodities. Don't try to time the markets? because it doesn't work over an extended period of time.

Here are examples of the "heart" of a portfolio. Think of the previous funds as the soul of a portfolio? but these are examples of core hybrid funds. These funds make up about 40% of our portfolios:

Capital Income Builder

Black Rock Global Allocation

Ivy Asset Strategy

Oakmark Equity and Income

Pearl Total Return

Vanguard Wellington

Thornburg Investment Income Builder

The heart of a portfolio consists of managers that can invest in any asset class. They can also be in foreign investments.

Bond Calculations

The following TVM register values are also used in the calculation:

n - Number of payments per year*.

i - Yield to Maturity.

PMT - Coupon percentage rate.

The [PRICE] key does not modify any memory register values. This function also calculates the interest accrued since the last interest date when the key is pressed, and the result is stored in the K memory register. If you are using an algebraic mode, you can ...