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illyfrancis edited this page Jul 9, 2013 · 36 revisions

Global custody

For Funds (Mutual funds / Exchange traded funds)

Derivatives

  • Three categories

    • OTC - customized, bilateral agreements that transfer risk from one party to the other. OTC derivatives, are sometimes called swap agreements or swaps, are negotiated privately between the two parties and then booked directly with each other
    • Standardized, exchange-traded derivatives - listed derivatives or futures. In contrast with OTC derivatives, listed derivatives are executed over a centralized trading venue known as an exchange and then booked with a central counter party known as a clearing house.
    • Cleared derivatives, which like OTC derivatives are negotiated bilaterally but like listed derivatives are booked with a clearing house

  • Swap

    • A bilateral agreement to exchange cash flows at specified intervals (payment dates) during the agreed-upon life of the transaction (maturity or tenor). Entering a swap typically does not require the payment of a fee

  • Interest rate swaps

    • An agreement to exchange interest rate cash flows, calculated on a notional principal amount, at specified intervals (payment dates) during the life of the agreement. Each party's payment obligation is computed using a different interest rate. In an interest rate swap, the notional principal is never exchanged. Although there are no standardized swaps, a plain vanilla swap typically refers to a generic interest rate swap in which one party pays a fixed rate and one party pays a floating rate (usually Libor - The London Interbank Offered Rate).

Standard deviation

  • variance (before sqrt), so higher the SD more risky it is
  • proper formula
  • Note Population Standard Deviation uses 1/N
  • Sample Standard Deviation uses 1/(N-1)
For example, using Sample SD formula
if the annual rate of return of a security over five terms
Given monthly returns of 2%, 7.5%, 1%, 6%, 1.5%
then the average is 3.6%

(3.6 - 2)^2 = 2.56
(3.6 - 7.5)^2 = 15.21
(3.6 - 1)^2 = 6.76
(3.6 - 6)^2 = 5.76
(3.6 - 1.5)^2 = 4.41

Sum = 34.7 / (5 terms - 1) = 8.675
sqrt(8.675) = 2.9 (standard deviation)

Mean value

  • Arithmatic mean - sum then divide : (a + b + c) / 3
  • Geometric mean - multiply all then take the root of number : (a * b * c)^(1/3)
  • The geometric mean takes previous values into account by linking them so it may be more relevant when averaging the funds performance etc

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