CDP Portfolio Management & Analytics Flashcards

What is 'scenario analysis' in derivatives portfolio management?

Answer: Evaluating portfolio performance under specific hypothetical market conditions such as an equity crash

Scenario analysis examines how a derivatives portfolio would perform under specific defined market conditions to identify vulnerabilities that standard statistical models might miss.

What is 'liquidity risk' in a derivatives portfolio?

Answer: Both the inability to exit positions at fair prices and the inability to meet margin calls

Liquidity risk in derivatives portfolios encompasses both market liquidity risk (inability to exit positions at fair prices) and funding liquidity risk (inability to meet margin calls with available cash).

What does the 'Sharpe ratio' measure in derivatives portfolio evaluation?

Answer: Risk-adjusted return calculated as excess return divided by portfolio standard deviation

The Sharpe ratio divides a portfolio's excess return (above the risk-free rate) by its standard deviation, measuring the return earned per unit of total risk taken.

What does 'mark-to-market' (MTM) mean for a derivatives portfolio?

Answer: Valuing derivatives positions at their current market value on a daily basis

Mark-to-market involves valuing all derivatives positions at current market prices each day, ensuring the portfolio reflects actual current economic value rather than historical cost.

What is 'tail risk' in a derivatives portfolio context?

Answer: The risk of extreme outcomes that occur with low probability but cause large losses

Tail risk refers to the possibility of rare, extreme market events causing losses far larger than what standard risk models predict, often described as black swan events.

What is 'position limits' management in a derivatives portfolio?

Answer: Setting maximum notional exposure per instrument or sector to comply with regulations and risk guidelines

Position limits establish maximum allowable exposure per instrument, sector, or market to comply with regulatory requirements and internal risk management policies, preventing excessive concentration.