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'''And would U like to add ur comment within ur NAME on it? Thx ''' Cacy1124 (talk) 09:23, 28 May 2008 (UTC)cacy1124

Riding the yield curve
trading strategy that is based upon the yield curve and used for interest rate futures. Investors hope to achieve capital gains by employing this strategy. Riding the yield curve strategy

Introduction: riding the yield curve is a technique that fixed-income portfolio managers traditionally use in order to enhance returns when the yield curve is upward sloping and is supported to remain unchanged. Riding the Yield Curve for Fun and Profit •	Basic idea: Assuming a positively sloped yield curve, purchase a security with a maturity longer than your expected holding period. •	Rationale: You will make money because 1) longer maturities pay higher rates, 2) when you sell it in the security will have a shorter maturity, hence lower rates,  hence a capital gain. Yield

.07

.04

1	       2		maturity (years) Example: You want to invest for 1 year. Current 1-year rate is 4%, 2-year rate is 7%. -- If you buy 1-year security make 4% -- If “ride,” price per dollar of face of 2-year security is .8734. If sell in one year when 1-year rate is 4%, get .9615

(a) this strategy may be difficult to implement in the first place. --	What will you be able to sell the security at next year? The market expects the rate on 1-year securities to be 10%. This implies the price will be .9090.

Profit reduced.Why this situation happen? Indeed, this strategy may be too naive. Let us look at an example: If the 1 year rate next year ends up 14%, (breakeven point) NOTE: You will make money riding the yield curve as long as the 1-year rate next year turns out to be less than the market forecast. If the rate turns out to be more than the market forecast, you will lose money. The market forecast is a “breakeven” rate.

If positive, market overestimated what rates would be, i.e. rate ended up less than the market expected.( recommends riding) If rates went up more than the market thought ! i.e got burned is you rode (markets underestimated inflation) (b)if the strategy can be implemented, reasons(including transaction costs), why it may end up performing relatively poorly. For implementing this strategy, we should be concern the relevant costs. Liquidity cost: Buying and selling from the yield curve strategy maintains sufficient liquidity for preventing the transaction costs offsetting the extra returns.( if not adequately maintain liquidity, may reduce the extra returns) Administrative costs. Administrative costs should be kept low( if not control this costs, also may hurt returns) Although this strategy can be complex and can impose higher administrative costs. However, these disadvantages can be overcome by taking advantage of the expertise and economies of scale provided by an external manager using pooled funds. As demonstrated by examples above, it still possible performs poorly. Reasons: 1.	assume only one factor drives the yield curve, focus on YTMs-assume only translation moves 2, ignore the reinvestment risk.

The rollover strategy
A rollover is when you do the following: 1. Reinvesting funds from a mature security into a new issue of the same or a similar security. 2. Transferring the holdings of one retirement plan to another without suffering tax consequences. 3. A charge that is incurred by Forex investors who move their positions to the following delivery date.

Roll-over strategy Definition: Reinvesting funds from a mature security into a new issue of the same or a similar security (investopedia). Investors can make significant profits by using a little-known strategy that requires liquidating one position and re-entering the same market in a later contract month (gtnews). Roll-over strategy is that of based on anticipation of interest rate. Example: YTM=10 Investment horizon: 5 years Interest rate is supposed to be increased by 2% in 1 year and will be unchanged from 1 year onwards. 1)	5 years licked-in Buy a 5-year maturity T-bill Hold it until maturity 2)	Roll-over Buy a 1 year maturity T-bill Hold it until maturity Buy a 4-year maturity T-bill in 1 year. Scenario 1	Year	0	1	2	3	4	5 Cash flows	-100	10	10	10	10	110 Scenario 2	Year	0	1	2	3	4	5 Cash flows	-100	10	12	12	12	112

In reality Scenario 1 Provides annual rate of return of 10.3%. Scenario 2 Provides annual rate of return of 11.6%.

However, roll-over strategy is based on anticipation of interest rate. In other words, investors have to predict the direction of a certain commodity correctly. Also, it is influenced by prevailing economic and financial market conditions. In this case, an analysis based on historic data of from 1965 to 1995 will be made.

Strategy 1, an investor locked into a 5-year rate at each month over the 1965-1995.

Strategy 2, an investor applies the roll-over strategy which assumes that the investor chose the 1-year term and renewed it yearly after the maturity at the prevailing 1-year rate, for a 5-year period.

The amount of accumulated interest is the sum of interest accrued over a 5-year period.

In the 1960s, due to low inflation and interest rate stability, strategy 1 produced a premium over scenario 2 60%. Even under the series of inflationary oil price shocks in the 1970s, strategy 1 was still outperforming scenario 2 by 50%. The disadvantage of strategy 1 was short term interest rates were higher than long term interest rates which was resulted from the inflation. Since the late 1970s to the 1980s, the strategy 1 investors were at the vantage point over the strategy 2 investors. Only in the mid 1980s, an inverted yield curve preceded a prolonged period of rising interest rates. The strategy 2 users were able to benefit from the stability of increasing interest rates. In a 30-year long period, the investors of strategy 1 outperformed over that of strategy 2. The only scene that strategy 2 worked better was during the periods characterised by high inflation and a subsequent sharp tightening in monetary policy. In conclusion, it would suggest that strategy 1 which is investing in a 5-year interest rates in a stable economic growth accompanied by moderate inflation. To be improved... —Preceding unsigned comment added by Hugo6 (talk • contribs) 04:57, 30 May 2008 (UTC)

The butterfly strategy
A butterfly strategy is an options strategy using multiple puts and/or calls to make a bet on future volatility without having to guess in which direction the market will move.

Rich-Cheap analysis
Rich and cheap refers to the pricing of a security relative to comparable securities in the secondary market. Rich, or overvalued bonds, have lower yields than bonds with similar terms and credit ratings. Cheap, or undervalued bonds, have higher yields than paper with similar maturity and credit risk.

Retrieved from "http://glossary.reuters.com/index.php/Rich_Cheap_Analysis" Cacy1124 (talk) 09:25, 28 May 2008 (UTC)cacy1124