Hedging Fixed Income Risk
Overview
Hedging refers to the process of trading instruments in
a portfolio in order to make the portfolio immune to
fluctuations in the interest rate curve.
As a general rule, a portfolio of long only fixed income
instruments is only hedged if all the instruments are
floating rate instruments. This is because any simple bond will
lose value as rates go up, and gain if rates go down, so a portfolio
with these types of bonds will lost value as rates go up. The only
instrument which does not lose value is a floating rate instrument.
Therefore in general, you will only hedge a portfolio that
contains both assets and liabilities, or a portfolio with
optionality.
Topics
Taylor Formula
