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LBriscoe

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tT
发表于 2011-7-11 15:27 | 只看该作者

R28 : Rebalancing

example, required, existing, security
V4, P30~31

On the top of P30, it is said : portfolio rebalancing is required to keep the portfolio DURATION syncronized with the horizon date. Then in 4.1.1.5 and Example 6 & 7, the rebalancing of the "DOLLAR DURATION" is introduced.

My questions :
Which shall be rebalance ? DURATION or DOLLAR DURATION ? How to rebalance the DURATION (not introduced in the text) ? In example 7, what does it mean by : We choose to rebalace using the existing security proportions of "one-third each" ?
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ohai

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2#
发表于 2011-7-11 15:27 | 只看该作者
Simple duration based rebalancing does not cover the effect of market price changes on the portfolio risk . Dollar duration which measures the PVBP gives us the effect of moving to a different point-in-time to current prices. Duration is , after all , a forward looking estimate while the portfolio value ( based on current prices) , is a present value term. The two in combination gives you a measure of risk of prices and duration both changing at the same time.

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Windjam

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3#
发表于 2011-7-11 15:27 | 只看该作者
bell99 Wrote:
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> If we define duration as % change in portfolio value for 100 bps change in interest rate, > than rebalancing the dollar duration is the same as rebalancing the duration.
>
> My opinion only.

Is it that : Rebalancing of DURATION = Rebalancing of DOLLAR DURATION ?
Anyone else can confirm ?

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wake2000

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4#
发表于 2011-7-11 15:27 | 只看该作者
DOLLAR Duration rebalancing is a technique . Duration rebalancing is a goal or target.

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jmh530

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5#
发表于 2011-7-11 15:28 | 只看该作者
janakisri Wrote:
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> DOLLAR Duration rebalancing is a technique .
> Duration rebalancing is a goal or target.

I was trying to explain that earlier but your explanation is very concise and precise. In some sense it's similar to delta hedging. You know that you want your delta to be equal to zero but you still have to calculate the number of underlying contracts to buy or sell and that depends on the position size. Similarly, you know what you want the portfolio duration to be but the number of contracts to buy or sell depends on the portfolio size. Dollar duration reflects both portfolio size and duration adjustment.

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strikethree

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6#
发表于 2011-7-11 15:28 | 只看该作者
janakisri / maratikus,

Can you (or anyone else) raise an example showing that the goal of duration rebalancing can be reached by rebalancing of the dollar duration ?

Duration rebalancing means keep the portfolio DURATION syncronized with the horizon date (of the liability). That is : to make the portfolio DURATION always same as the period left to the horizon date (of the liability).

In Example 6 on P30, the portfolio's duration is 3.636. But in Example 7 on P31, after one year, the portfolio's durations both BEFORE and AFTER the rebalancing are same (2.725). This means that rebalancing the dollar duration has nothing to do with the the rebalancing of the duration. The horizon date (the time period left) of the liability is not indicated in the examples.

Then, how to rebalance the portfolio's DURATION ?

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NakedPuts2011

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7#
发表于 2011-7-11 15:28 | 只看该作者
2010 AM Exam Q6

This shall to be what I have been looking for. But I wonder why the cases are not illustrated in Reading 28 or elsewhere in the curriculum.

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