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Active Trading Strategies: Presented by-GROUP 6

Active traders take views on future interest rate movements and try to beat market returns by strategically investing in bonds. Common strategies include laddering bonds of different maturities to minimize risk, barbelling with short and long term bonds, and bulleting with a concentration in one maturity. The strategies aim to perform well in different yield curve shift scenarios like parallel shifts, flattening, steepening, or shifts that cause a humped yield curve. Total returns also include coupon income and reinvestment income, not just capital gains/losses from rate movements.

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Siddhi Poddar
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158 views20 pages

Active Trading Strategies: Presented by-GROUP 6

Active traders take views on future interest rate movements and try to beat market returns by strategically investing in bonds. Common strategies include laddering bonds of different maturities to minimize risk, barbelling with short and long term bonds, and bulleting with a concentration in one maturity. The strategies aim to perform well in different yield curve shift scenarios like parallel shifts, flattening, steepening, or shifts that cause a humped yield curve. Total returns also include coupon income and reinvestment income, not just capital gains/losses from rate movements.

Uploaded by

Siddhi Poddar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACTIVE TRADING STRATEGIES

Presented by- GROUP 6

Active Trader
Takes views on future interest rates movements Anticipate what would be the movements in the future prices Invest in bonds not to earn the market returns but to beat the market returns Manage interest rate risk Minimize the losses in rising interest rates scenario and maximize the profits in falling interest rates scenario Active trading strategies are typically speculative in nature.

Strategies adopted by Active Trader


LADDER
Percent of Portfolio Maturing 10

Laddered Maturity Strategy

8 9 10 Maturity in Years

BARBELL

Percent of Portfolio Maturing 40


30

Barbell Maturity Strategy

20
10 1 2 3 4 ... ... 10 11 12 13 14 15 Maturity in Years

BULLET

Bullet
45 40 35 30 25 20 15 10 5 0

% of Portfolio

Maturities

21 -2 5

11

13

15

Anticipation of Movements in Yield Curve


No Shift in The Yield Curve

In case the anticipation is that the yield curve is going to remain flat in the coming years then the trading strategy that can be used by the active portfolio manager is riding the yield curve.

Assuming Yield Curve is upward sloping

Parallel Shift in the yield curve


Upward Shift in The Yield Curve Bullet Strategy with Short Duration Bonds

0.00% 0 -2.00% -4.00% -6.00% -8.00% -10.00% -12.00% Percentage decrease in Price 5 10 15 20 25 30 35

Maturity in Years

Upward Shift in The Yield Curve Bullet Strategy with Long Duration Bonds

14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 0 10 20 Maturity in years 30 40 Percentage increase in Price

Shifts with a Twist


Flattening

Bearish Flattening
Barbell Strategy
0.00% 0 -0.50% -1.00% -1.50% -2.00% -2.50% -3.00% -3.50% Percentage decrease in Price 10 20 30 40

Bullish Flattening
9.00%

Bullet Strategy

8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0 10 20 30 40 Residual maturity in years Percentage increase in price

Steepening

Bearish Steepening
Bullet Strategy
0.00% 0 5 10 15 20 25 30 35

-2.00%
-4.00% -6.00% -8.00% -10.00% -12.00% -14.00%

Maturity in years

Bullish Steepening
6.00%

Bullet Strategy

5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0 5 10 15 20 25 30 35 Maturity in Years

Shift with Humpedness


Positive Butterfly
There is an increase in both short and long-term rates relative to intermediate rates.

Negative Butterfly
There is a decrease in both short and long-term rates relative to intermediate rates

Upward Positive Butterfly


Bullet Strategy with Short/Medium Duration Bond

0.00% 0 -1.00% -2.00% -3.00% -4.00% -5.00% -6.00% Percentage decrease in Price 10 20 30 40

Maturity in Years

Downward Positive Butterfly


Bullet Strategy with Medium Duration Bond

25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 0 10 20 30 40 maturity in Years Percentage increase in Price

Upward Negative Butterfly


Barbell Strategy

0.00% -1.00% 0 10 20 30 40

-2.00%
-3.00% -4.00% -5.00% -6.00% -7.00% -8.00% -9.00% Maturity in Years Percentage decrease in Price

Downward Negative Butterfly


Bullet Strategy with extreme long term bonds

25.00% 20.00%

15.00%
10.00% 5.00% 0.00% 0 10 20 30 40 Maturity in Years Percentage increase in Price

Total Return
There are three components from which the returns can be earned:

Coupon income on bonds


Capital gain Reinvestment income

In all the examples given above we have considered only capital gains and losses however the total return would be less severe than that

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