active trading strategies

8/3/2019 Active Trading Strategies

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ACTIVE TRADINGSTRATEGIES

Presented by- GROUP 6


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Active Trader

Takes views on future interest rates movements

Anticipate what would be the movements in the futureprices

Invest in bonds not to earn the market returns but tobeat the market returns

Manage interest rate risk

Minimize the losses in rising interest rates scenario andmaximize the profits in falling interest rates scenario

Active trading strategies are typically speculative innature.


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BARBELL

Percent of PortfolioMaturing

40

1 2 3 4 10 11 12 13 15

Barbell Maturity Strategy

30

20

10

... ... 14Maturity in Years


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BULLET

Bullet

0

5

10

15

20

25

3035

40

45

1 3 5 7 9 11 13 15

21-2

5

Maturities

%o

fPortfolio


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Anticipation of Movements inYield Curve

No Shift in The Yield Curve

In case the anticipation is that the yield curve is going to

remain flat in the coming years then the trading strategythat can be used by the active portfolio manager isriding the yield curve.

Assuming Yield Curve is upward sloping


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Upward Shift in The Yield Curve

Bullet Strategy with ShortDuration Bonds

Parallel Shift in the yield curve

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

0 5 10 15 20 25 30 35

Maturity in Years

Percentage decrease inPrice


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Upward Shift in The Yield Curve

Bullet Strategy with LongDuration Bonds

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

0 10 20 30 40Maturity in years

Percentage increase in Price


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Shifts with a Twist

Flattening


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Bearish Flattening

Barbell Strategy

Bullish Flattening

Bullet Strategy

-3.50%

-3.00%

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0 10 20 30 40

Percentage decreasein Price

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

0 10 20 30 40Residual maturity in years

Percentage increasein price


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Steepening


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Bearish Steepening

Bullet Strategy

Bullish Steepening

Bullet Strategy

-14.00%

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

0 5 10 15 20 25 30 35

Maturity in years

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

0 5 10 15 20 25 30 35Maturity in Years


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Shift with Humpedness

Positive Butterfly

There isan increase in both short and long-term rates

relative to intermediate rates.

Negative Butterfly

There is a decrease in both short and long-term rates

relative to intermediate rates


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Upward Positive Butterfly

Bullet Strategy withShort/Medium DurationBond

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

0 10 20 30 40

Maturity in Years



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Downward Positive Butterfly

Bullet Strategy withMedium Duration Bond

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

0 10 20 30 40maturity in Years

Percentage increasein Price


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Upward Negative Butterfly

Barbell Strategy

-9.00%

-8.00%

-7.00%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

0 10 20 30 40

Maturity in Years



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Downward Negative Butterfly

Bullet Strategy withextreme long term bonds

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

0 10 20 30 40Maturity in Years

Percentage increasein Price


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Total Return

There are three components from which the returns can beearned:

Coupon income on bonds

Capital gain

Reinvestment income

In all the examples given above we have considered only

capital gains and losses however the total return wouldbe less severe than that


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active trading strategies

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