Modern Financial Systems: Theory and Applications

CHAPTER 15

Nonmarketable Securities Portfolios

For portfolios of nonmarketable assets, governance presents all the tasks discussed in Chapter 14 except active trading, which is supplanted by a need for relatively more intense monitoring. In addition, there is a greater need for control and adjustment: If monitoring indicates some investment is presenting potential difficulty, the portfolio manager may find it necessary to influence operations of the firms in question. Still further, forward-looking governance of illiquid assets involves planning how to avoid liquidity crises and hence avoid the need to sell assets under pressure. Chapter 15 begins by explaining the importance of distinguishing market and default risk. It then discusses how governance of nonmarketable securities uses techniques for managing portfolio income and portfolio risk. The evolution of securitization is discussed, including the changing nature of mortgage pools. Finally default insurance, the use of credit derivatives and credit default swaps are discussed.

CHARACTERISTICS OF ILLIQUID PORTFOLIOS

Managing portfolios of nonmarketable securities involves governing illiquid investments that cannot readily be traded at prices close to their estimated value. The governance tasks differ according to whether the illiquid instruments are assets or liabilities: Governance of an insurance company portfolio containing mostly liquid assets and illiquid liabilities differs considerably from governance of a bank with ...