Question

(a). Briefly describe the pros and cons to using derivative enabled strategies.

(b). Briefly describe the similarities between selecting a bond manager and an equity manager.

Answer 1

1.a) derivatives are instruments who derive value from underlying assets.

There are various process of using derivatives. They are as follows-.

1.They help in designing various types of hedging strategies which acts as a hedge for value erosion of portfolio.

2. They can be easily customised and used under every circumstances and it can be designed according to various risk appetite and payouts.

3. Derivatives also be used for generation of high amount of profit through leverage.

Cons of derivatives are as follows-

1. These are highly complex instruments which are been designed for experts..

2. These are highly expensive instruments which have a lot of cost and that upset the profits to a very large extent.

3. Liquidity can be an issue for certain types of derivatives.

1.B. Similarities between selecting and equity manager and debt manager as follows -

A. Net risk tolerance and risk management strategies are needed to be looked into.

B. Past performance of both equity managers and debt managers are checked completely.

C.debt managers and equity managers are both exposed to a lot of market risk so it is needed to to analyse the risk reaction strategies about the managers.

D.Ability of leadership must also be looked into to manage a large amount of fund.