9.1 Simple Portfolio
Let us consider a portfolio made up of a government bond and an equity index futures (the same portfolio considered in Chapter 1):
Own $20M U.S. Treasury 10-year bond.
Long €7M nominal of CAC futures (French equity index).
We can take this as a simple example or analogue of a trading firm, with the bond representing a fixed-income trading desk or investment portfolio and the futures representing an equity trading desk or investment portfolio. In a real firm, there would be many positions but the simplicity of the portfolio allows us to focus on the techniques and tools without taking on the complexity of a real portfolio. We turn in Chapter 10 to a more complex portfolio, where the quantitative techniques bring value. Nonetheless, even this simple portfolio exhibits multiple risks:
Yield risk—U.S. Treasury curve.
Equity risk.
Operational risk.
Delivery risk for ...
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