London, Sept 14, 2012 - (ACN Newswire) - In these uncertain times private wealth management in Asia should revolve around safe haven, dollar based riskless assets
, says Christian Menegatti, Managing Director & Head of Global Economic Research, Roubini Global Economics, USA.
In the absence of a bequest motive, both financial wealth and the implicit riskless assets
(state pensions) are being depleted at similar rates.
Chief Investment Officer Alan Mudie argues that the traditional idea of portfolio management - based on the premise that riskless assets
exist - has become obsolete.
However, this process makes no explicit reference to equilibrium in the market for riskless assets
To reduce deposit risk, banks substituted riskless assets
Similarly, provisions of the Federal Reserve Act enabled banks to convert illiquid assets, such as loans, into riskless assets
(deposits at the central bank) through the discount window and to complete payments using Federal Reserve credits.
It is shown that an unequal distribution of savings can lead to a rise in the proportion of risky to riskless assets
held by banks, increasing the chance of bank failure.
Equation (5[prime]) states that under risk neutrality, the price ratio of two riskless assets
predicts the rate of change in exchange rates when opportunities for arbitrage profit cease to exist.
The offsetting payoff profiles for a short position in risky assets or risky securities is: buy forwards or futures, increase long positions in assets, long a call plus short a put, or increase the ratio of risky assets to riskless assets
As discussed above, we require a delta-hedging portfolio consisting of risky and riskless assets
to replicate the terminal value of the fund.
4) Note that the price ratio of two nominal riskless assets
(below) is not a predictor of the expected rate of change in exchange rates, unless exchange rates and domestic risk adjustment factors are independent or investors are risk-neutral.
Assumption 3: The insurer invests in riskless assets