Article Abstract:
Derivatives are good instruments to hedge against risk. Skillful management on the part of pension fund managers would be insurance against loss. Derivatives allow investors to reduce interest rate, currency or commodity risk, easily reallocate assets in portfolio cheaply, increase rates of return and alter the payoff pattern of an exposure. Highly-skilled and sophisticated personnel and systems are the keys to managing derivatives. They must be well-compensated. Five elements to managing derivatives are presented.
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Article Abstract:
Pension fund assets should be constantly monitored to keep them safe from derivative risks. Other risks which accompany pension fund assets include market, mismatch of strategy, legal and counterparty risks and volatility of contract value. When derivatives are used with pension funds, parameters such as products and strategies to be used and amount of capital that may be put at risk must be set by fund managers. Once such parameters are established, monitoring of derivative risk must be carried out.
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Article Abstract:
The New York University Stern School of Business prepared a study on how pension funds monitor risks. Volatility of return is the measure of risk being widely monitored. About 67% of the respondents ranked it the most important. About 47% have considered currency risk, concentration risk and prepayment risk also important. Reinvestment risk is associated with prepayment risk; it is a major risk for fixed-income investments. Attribution testing is one of the techniques in assessing risk.
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