CDP Portfolio Management & Analytics Flashcards

What is 'convexity' in the context of fixed-income derivatives?

Answer: The measure of the curvature in the price-yield relationship of a bond or fixed-income derivative

Convexity measures how the duration of a bond or fixed-income derivative changes as interest rates change, capturing the non-linear (curved) price-yield relationship.

What is 'cross-gamma' risk in multi-asset derivatives portfolios?

Answer: The sensitivity of one position's delta to price changes in a different underlying asset

Cross-gamma measures how the delta of one instrument changes when the price of a different underlying asset moves, important for portfolios with derivatives on correlated assets.

What does 'expected shortfall' (ES), also known as CVaR, measure?

Answer: The expected loss in scenarios that exceed the VaR threshold

Expected Shortfall (ES), or Conditional VaR (CVaR), measures the average loss in the worst-case scenarios beyond the VaR threshold, providing a more complete picture of tail risk.

What is 'rebalancing' a derivatives portfolio?

Answer: Adjusting portfolio positions to restore target risk exposures or allocations

Rebalancing involves buying and selling derivatives positions to bring the portfolio back into alignment with target risk levels, exposures, or allocations as market conditions change.

What does 'theta decay' describe and how does it affect an options portfolio?

Answer: Theta measures the rate at which an option loses value as time passes, eroding option premiums daily

Theta (time decay) represents the daily erosion of an option's extrinsic value as expiration approaches, with the rate of decay accelerating as expiration nears.

What is a 'vega-neutral' position in portfolio management?

Answer: A portfolio structured so that changes in implied volatility have no net effect on its value

A vega-neutral portfolio is constructed so that the net vega equals zero, meaning changes in implied volatility levels do not affect the overall portfolio value.