7Lecture8interestrateriskIV

Decrease da andor increase dl which means lower

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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? B/S 2-year Loan (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 not feasible ► 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 Definition 0 1 Settlement Agree - Price - 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 Standardized contract...
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This note was uploaded on 03/12/2014 for the course FINE 442 at McGill.

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