Posted: February 10th, 2015

Two Sovereign Bond Portfolio

Paper, Order, or Assignment Requirements

 
(Notes from class about the assignment)

How to manage credit sovereign risk?

Portfolio credit risk

• Standard credit risk (Macro + trade)
• Correlation (between different bonds from different countries)

Sovereign risk:

• Rating data

Fundamental for sovereign analysis:

• Fiscal Situation
• Debt issuance and stock of debt
• Currency of debt

Size and structure of the economy

Market Data:

• Sovereign bonds
• Sovereign Credit default swaps

Sovereign Bonds:

• Transform market yield into a measure of credit quality
• Liquidity
• Risk free component
• Embedded optionality

Assignment:

• Two sovereign bonds (two different countries)
• Full credit analysis
• Interest rate (pattern)
• Duration/Convexity .. Sensitivities (Economy, Inflation … )
• Correlation can be done at the end.
• How high is my yield? Can I get my money back? What will happen to interest rates? How much are the coupons going to be?
• What are the weights of each bond in the portfolio? Assume that we have $100 Million to invest