lec03_03 - ECON 4721H Money and Banking Lecture 03_03...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 03_03 Satoshi Tanaka University of Minnesota October 5, 2011 Satoshi Tanaka ECON 4721H Money and Banking Lecture 03_03 Bond Market III Understanding Inerest Rate Risks Satoshi Tanaka ECON 4721H Money and Banking Lecture 03_03 Planning Period Immunization De nition (Planning Period Immunization) Planning period immunization is a asset management strategy to hedge interest rate risks for a given period of investment. Satoshi Tanaka ECON 4721H Money and Banking Lecture 03_03 Exercise: Planning Period Immunization Goal: To get $10500 after 4 years. Spot rate: Currently annual 5% rate. Assumption: You have $8640. Only 1-year, 3-years, 5-years bonds are available. Risks: After 3 years, the spot rate may change, 4% w.p. 1 2 and 6% w.p. 1 2 . Problem: If you invest $8640 in 3-years bonds. After 3 years, you will get $10000. But, you will be exposed to interest rate risks. You may not achieve $10500....
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lec03_03 - ECON 4721H Money and Banking Lecture 03_03...

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