http://www.mortgage-consultant.info Wed, 07 Dec 2011 11:45:05 +0000 en hourly 1 http://wordpress.org/?v=3.2.1 http://www.mortgage-consultant.info/tracking-error/ http://www.mortgage-consultant.info/tracking-error/#comments Wed, 29 Jun 2011 18:04:34 +0000 admin http://www.mortgage-consultant.info/?p=4 Just as corporations have to deal with “forecasting error” in terms of the deviation of forecast exchange rates relative to the actual future rate, so investors have to deal with tracking error within their portfolios, which is the return of the portfolio relative to the investment benchmark index being used. A portfolio manager can significantly affect the tracking error of their portfolio by the selection of the currency hedging benchmark. Empirically, it has been found that a 50% or symmetrical currency hedging benchmark generates around 70% of the tracking error of that generated by using a polar of 100% currency hedging benchmark. Put another way, the tracking error of a polar currency hedging benchmark is around 1.41 times that of a 50% hedged benchmark. The advantage of a symmetrical or 50% currency hedged benchmark for a portfolio manager is that it reduces tracking error and it also enables them to participate in both bull and bear currency markets.
Two popular types of active currency management strategy are the differential forward strategy and the trend-following strategy. Both of these strategies have consistently added alpha to a portfolio if followed rigorously and interestingly have also proven to be risk reducing compared to unhedged benchmarks. Thus, they also help to boost significantly the portfolio’s Sharpe ratio.

]]> http://www.mortgage-consultant.info/tracking-error/feed/ 0 http://www.mortgage-consultant.info/exposure-at-time-of-default/ http://www.mortgage-consultant.info/exposure-at-time-of-default/#comments Mon, 29 Jun 2009 11:26:01 +0000 admin http://www.mortgage-consultant.info/?p=59 The actual exposure is likely to vary over the term of the loan. In the case of mortgages the principal outstanding falls over time. Continued drawdowns on loans for project financing or real estate will result in the principal increasing over time. Where the exposure is a credit facility it is likely that the customer in financial distress will draw down to the maximum allowed under the terms of the facility before defaulting on any other loans. Derivative and other transactions may also result in the bank having an outstanding exposure and these will need to be taken into account.

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