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Unformatted text preview: L = - D L * L * Δ r/(1+r) 38 4. Hedging Strategies
• Hedging or Matching?
If maturity of Assets = maturity of Liabilities,
is the F/I immunized against interest rate risk?
(single pmt) 2-year CD
(annual pmts) 39 So Dgap = DA – DL (L/A) > 0
► Dgap = 0 ?
Decrease DA and/or Increase DL
which means lower profitability
► Use derivatives (Off B/S) to hedge
the B/S because it is easier to adjust
hedging to changing circumstances 40 A. Hedging using Forward Contracts
- Size Pay Deliver - Maturity
41 Example -Portfolio Manager
• He holds a 20-year $1 mln face value bonds
on the BS with MV at 97 per $100,
• Current YTM = 8%, DA= 9 years
• Receive a forecast that interest rates are
expected to rise by 2%(??) over the next 3
months 42 Hedging Position?
Concern? 0 1 43 Expected loss if r ↑ 2%
Δ B = - DB * B * Δ r/(1+r) Forward Market
Sell 20-year bond with $ 1mln face value
for forward delivery in 3 months at 97 44 In 3 months !
Rates go up 45 B. Hedging with Futures Contracts
Definition – Similar to Forward
Agree today on price, size and maturity and
deliver/pay at maturity 46 Differences
Futures Forward Organized
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This note was uploaded on 03/12/2014 for the course FINE 442 at McGill.