Strategy Profit or Loss and Exposure Reporting

A fixed-income relative value or credit fund trades a combination of government bonds, corporate bonds, futures, options, CDS, and swaps that all need to be independently priced and that are either financed via repo transactions or have financing embedded in the product itself. Every trade or position in the fund generates a profit or loss based on the change in the value of the security or derivative bought or sold short. Rising prices result in profitable long positions, and falling prices result in profitable short positions. The opposite is also true in that falling prices result in losses on long positions and rising prices hurt short positions. Trading gain or loss is similar for both securities owned and on the fund's balance sheet and those that are owned yet accounted for as off-balance-sheet items. On-balance-sheet items either require cash or generate cash and result in interest income or expense, coupons and dividends, whereas off-balance-sheet listed derivatives do not require any direct financing from dealers or banks. Off-balance-sheet OTC derivatives executed with dealers may have explicit financing costs embedded in the pricing of the derivative instrument.

Each long position held in a portfolio that is on the balance sheet results in a financing charge being incurred and a coupon or dividend income payment being received. Each short position on the fund's balance sheet can result in a coupon or dividend being paid ...

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