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CDP Portfolio Management & Analytics Flashcards

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  1. What does 'Value at Risk' (VaR) measure in a derivatives portfolio?

    Answer: The maximum loss a portfolio is expected to experience with a given confidence level over a specific period

    VaR estimates the maximum loss a portfolio is likely to suffer over a defined period at a specified confidence level (e.g., 95% or 99%), given normal market conditions.

  2. What is 'portfolio Greeks' analysis used for?

    Answer: Measuring the aggregate sensitivities of a derivatives portfolio to various market factors

    Portfolio Greeks aggregates the individual delta, gamma, vega, theta, and rho of all positions to understand the portfolio's overall sensitivity to market changes.

  3. What is 'correlation risk' in a multi-asset derivatives portfolio?

    Answer: The risk that assumed correlations between assets change, affecting portfolio performance

    Correlation risk arises when the actual correlation between assets in a portfolio differs from assumed correlations, which can invalidate hedging strategies and affect portfolio value.

  4. What is the purpose of 'stress testing' a derivatives portfolio?

    Answer: To evaluate how a portfolio performs under extreme but plausible market scenarios

    Stress testing subjects a derivatives portfolio to extreme market scenarios (e.g., large rate moves, volatility spikes) to identify potential vulnerabilities and losses beyond normal VaR estimates.

  5. What does 'net exposure' mean in derivatives portfolio management?

    Answer: The combined directional risk after offsetting long and short positions

    Net exposure is the residual directional risk remaining after long and short positions offset each other, representing the actual market risk the portfolio bears.

  6. What is 'P&L attribution' in derivatives portfolio management?

    Answer: Breaking down portfolio profit and loss into contributions from individual risk factors such as delta and vega

    P&L attribution decomposes portfolio performance into contributions from market factors such as delta (price moves), vega (volatility changes), and theta (time decay) to understand return drivers.

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