Lecture 10: bond portfolio management applications

Question 1

Why do we look to control duration of a portfolio

Answer 1

Lower duration translates to lower interest rate exposure for the portfolio given a parallel shift in the yield curve.
allows you to match benchmarks etc.

Question 2

What is hedging

Answer 2

Nothing more than an interest rate risk management where the target duration is 0

where the net profit or loss is exactly as anticipated is known as a perfect hedge.

Question 3

Short vs Long hedge

Answer 3

Short hedge
- used to protect against a declin in the cash price of a bond.
short/sell futures

long hedge
- undertaken to protect against the increase in the cash price of a bond.
long/buy futures.

Question 4

Hedge ratio

Answer 4

Chosen with the intention of matching the volatility of the futures asset to the volatility of the asset.
refer to handwritten notes for more XD