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Liquidity and Funding Risks

Terms in this set (19)

Trading Level
the amount of capital traded in an active risk account, as well as the denominator used to calculate leveraged return.
Funding Level
the total cash or collateral posted by the investor to support the trading level.
Notional funding
the added exposure the trading level that is allowed by the CTA.
Trading Level Formula
Trading level = funding level + notional level
Initial Margin
the amount of cash or risk-free securities that must de deposited to trade a specific futures contract.
Maintenance Margin
often lower than the initial margin, this margin is the required amount that must be in an account to carry futures positions that were previously initiated.
Margin-to-equity ratio
Expressed as a percentage, this ratio is the amount of assets held for margin relative to the NVV of the investment amount.
cross-margin benefits
exists when a CTA has many positions in futures contracts that are traded on the same exchange so that the total amount of margin required is less than the sum of the margins required on the individual contracts.
Variation margin
the daily settlement of gains and losses in futures markets.
Stop Losses
prices where a futures position will be exited based on an adverse price move
Capital at Risk
the total loss incurred if each position in a trader's portfolio hits its stop-loss price level on a particular day.
Value at Risk (VaR)
assigns a value to the potential loss a portfolio can have over a given holding period at a specific confidence level.
Scenario Analysis
a simulation used to estimate how a portfolio will perform under various market situations.
What is a 5 sigma move?
taking the notional contract value and multiplying it by five times the one standard deviation price move.
Omega Ratio
used to measure risk by using the entire return distribution of an investment, the ratio of the total realized return in excess of a target return, relative to the total realized loss relative to the same target return.
What does an Omega Ratio of 1 mean
likely output for a symmetrical distribution with a target return equal to the mean.
Omega Ratio <1
the investments summed return falls short of the target level.
Decay function
used to assign less weight to old valuations and more weight to recent valuations
When is an Omega Ratio Reduced?
higher volatility, higher kurtosis and lower skewness.
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