Hi In Q5 on this paper the responses under (d) include mention of front running, I have not noticed this in the notes anywhere, would we be expected to 'know' this definition or as long as we describe it are we ok? I identified that there was an issue market practice/conflict of interest and noted there should be confidentiality rules to prevent this knowledge being used for the benefit of the employees ahead of the clients. I am imagining it used to form part of the core reading/glossary and no longer does. Would you agree? Thank you
Yes, the term is a common one in the financial markets but would not have been familiar to many ST5 students of the time. It was never in the ST5 notes. You would not have needed to use the term to get the mark though. You just had to point out that buying shares for your personal account, just ahead of buying them for the institution, would be illegal and bad market practice.
Hi In Q6 - mark scheme says we need to discount using bond yields for immunisation, why do we do that? Does it not depend on the valuation process? Thank you
Immunisation is a bit out of date. In 2015 there would have been more in the core reading on it - and one of the criteria is that the PV of assets would have to be the same as the PV of liabilities. To work out either of these you need to discount.
Hi Colin Thank you, I understand we would need to discount, I think my query was why we would use bond yields, rather than other yields/rates to discount? Thank you
Bond rates would be the most obvious rates to use, but you could use swap rates I suppose. However I dont see any advantage in using anything other than the bond yield. Let me know if you think there is another rate that you feel is more justifiable.
