april 2009 q3

[dimitris13]

hi,
regarding q 1 ii the revision notes mention
using puttable swaps gives the pension fund managers the option to terminate any existing swap and enter a new one

so pension fund may purchase puttable bonds to stay flexible ; how this is deduced from the previous?

and later it mentions that if yield picks up is high; what dobwe mean here with yield? the yield of the bonds so if goes up the value of the fixed leg will go down? or the rate of the fixed leg ?or sth else?

thanks

 

[Colin McKee]

For part (ii) the examiner is giving a couple of reasons to enter the swap. One for risk mitigation. And one for higher return if there is a yield pick up.
A puttable swap would be more flexible that one without a put option.

 

[dimitris13]

For part (ii) the examiner is giving a couple of reasons to enter the swap. One for risk mitigation. And one for higher return if there is a yield pick up.
A puttable swap would be more flexible that one without a put option.

many thanks for this.
i dont get the higher yield . yield on what ? on the bonds ?
also how can i come up with the puttable bond answer ?

 

[Colin McKee]

Yes - the question was looking for reasons why you would buy the puttable swap, and one is that the swap give a yield pick up (which means a higher yield than other things that do a similar job, such as bonds).
I am not sure how you come up with the solution as everyone learns in a different way, but as you work through the past papers you will find that your knowledge increases and you will find it easier.

 

[dimitris13]

Yes - the question was looking for reasons why you would buy the puttable swap, and one is that the swap give a yield pick up (which means a higher yield than other things that do a similar job, such as bonds).
I am not sure how you come up with the solution as everyone learns in a different way, but as you work through the past papers you will find that your knowledge increases and you will find it easier.

thanks Colin!