IFoA SA7 flashcards

35 cards. Read the term and the definition here. The deck at the top of this page is optional.

Modified duration

Percentage change in bond price for a small parallel shift in yield, approximately equal to Macaulay duration divided by one plus the yield per period.

Credit spread

Difference between the yield on a corporate bond and the yield on a government bond of matching maturity, reflecting default, recovery and liquidity risk.

Yield curve inversion

A downward-sloping yield curve where short-term yields exceed long-term yields, often interpreted as a signal of expected rate cuts and weaker growth.

Real return

Return after inflation, computed approximately as nominal return minus inflation, or exactly as (1+nominal)/(1+inflation) minus one.

Redington immunisation

Conditions requiring equal present values, equal durations and asset convexity at least equal to liability convexity, protecting surplus against small parallel rate shifts.

Duration gap

Difference between the duration of liabilities and the duration of assets, weighted by their respective values, driving first-order surplus volatility.

LDI overlay

Leveraged derivative or repo position used alongside growth assets to extend the interest-rate and inflation hedge of a pension scheme's liabilities.

Buy-out basis

Prudent funding measure reflecting the cost of transferring liabilities to an insurer, typically lower than ongoing technical provisions because of insurer margins.

Put-call parity

Relationship C minus P equals S minus K times the discount factor, linking European call and put prices on the same non-dividend-paying underlying.

Bootstrapping

Sequential process deriving spot rates from coupon bond prices by using earlier spot rates to value intermediate coupons and solving for the next rate.

Option delta

Rate of change of an option's price with respect to the underlying price; between zero and one for calls and minus one and zero for puts.

Par swap rate

Fixed rate that makes the present value of the fixed leg equal to the present value of the floating leg at swap inception, so the swap value is zero.

Tracking error

Standard deviation of the difference between portfolio and benchmark returns, measuring the volatility of active risk taken by a manager.

Risk budgeting

Allocation of a total risk measure, such as volatility or tracking error, across managers or factors, rather than allocating capital alone.

Capital market line

Straight line from the risk-free rate through the tangency portfolio on the efficient frontier, showing combinations of risk-free asset and tangency portfolio.

Marginal contribution to risk

Change in portfolio volatility from a small increase in a holding's weight, equal to the covariance of that holding with the portfolio divided by portfolio volatility.

Expected shortfall

Average loss conditional on losses exceeding the Value at Risk threshold; a coherent risk measure that captures tail severity unlike VaR.

Basis risk

Risk that the hedging instrument and hedged exposure do not move perfectly together, leaving residual exposure in an otherwise hedged position.

Futures beta hedge

Number of futures contracts equals target beta minus current beta, multiplied by portfolio value and divided by futures price times contract multiplier.

Collateralised derivative

OTC contract supported by a credit support annex requiring variation and initial margin, reducing counterparty credit exposure to mark-to-market movements.

Time-weighted return

Return that chains sub-period returns so that external cash flows do not affect the measure, isolating investment manager performance.

Brinson attribution

Decomposition of active return into allocation, selection and interaction effects by comparing portfolio and benchmark weights and sector returns.

Information ratio

Active return divided by tracking error, measuring the reward per unit of active risk taken relative to a specified benchmark.

Money-weighted return

Internal rate of return on portfolio cash flows and ending value, reflecting the investor's actual experience including the timing of contributions and withdrawals.

Solvency capital requirement

Risk-based capital amount under Solvency II calibrated so that the insurer can meet obligations with 99.5 percent probability over one year.

Matching adjustment

Solvency II mechanism allowing firms to add a spread to the discount rate for eligible illiquid liabilities backed by matching long-dated assets.

SFCR

Solvency and Financial Condition Report, a public annual disclosure by Solvency II insurers covering business, governance, risk profile, valuation and capital management.

Statement of funding principles

UK pension scheme document recording the trustees' policy on funding the scheme, including the method and assumptions for the actuarial valuation.

J-curve

Pattern of private equity fund returns showing early negative performance from fees and unrealised investments, followed by gains as exits occur.

Property capitalisation yield

Net operating income divided by property value, used to value property on an income basis; yields rise as values fall.

Public market equivalent

Method comparing private equity cash flows with returns on a listed index over the same periods, addressing the timing distortions of IRR.

Loss aversion

Behavioural tendency to weight losses roughly twice as heavily as equivalent gains, producing risk-seeking choices when facing losses.

Disposition effect

Tendency of investors to sell winning positions too early and hold losing positions too long, harming after-tax and risk-adjusted returns.

Anchoring bias

Reliance on an initial reference value, such as a purchase price, when making subsequent valuation or allocation judgements, even if the anchor is irrelevant.

Prospect theory

Descriptive model in which value depends on gains and losses relative to a reference point, with concave gains, convex losses and loss aversion.