Overview
Hedging a portfolio means to trade the portfolio so as to reduce or eliminate some of the risk in the portfolio. The market risk in a portfolio of fixed income assets comes from fluctuations in the yield curve. All bonds can lose value from interest rate fluctuations, except floating rate instruments.
The primiary method of hedging fixed income risk is through the use of sensitivity analysis of the portfolio, particularly, utilizing the following riks measures:
which are based on applying Taylor Formula to the value of the portfolio.