International Hedge of Fixed-Income Contracts

Journal of Portfolio Management, Vol. 27, No. 2, pp. 91-100, Winter 2001

10 Pages Posted: 5 Feb 2008 Last revised: 8 Oct 2013

See all articles by Shmuel Hauser

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management; Government of the State of Israel - Israel Securities Authority

Miron Rozenkranz

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management

Uri Ben-Zion

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management; National Bureau of Economic Research (NBER)

Uzi Yaari

Rutgers University; School of Business-Camden

Abstract

The literature on the role of duration and convexity in managing the interest rate risk of fixed-income contracts is concerned primarily with single-currency domestic applications. The dominant view appears to be that fixed-income risk management in the international setting involves a mere replication of domestic immunizations. Using simulation on real data, we show that risk reduction by separate duration matching of assets and liabilities in each country can be improved upon in accuracy and cost. This is accomplished by extending the domestic single-currency immunization methodology to the international setting. The proposed strategy requires that duration be matched only between the overall portfolios of assets and liabilities held in the various countries, rather than between the assets and liabilities held in each country. Based on reasonably weak assumptions, our dedicated international immunization model yields a hedging strategy that is less restrictive, more economical, and possibly more efficient than a mere replication of domestic immunization.

Keywords: fixed-income contracts, international hedge, duration match, immunization

JEL Classification: F34, G15, G11

Suggested Citation

Hauser, Shmuel and Rozenkranz, Miron and Ben-Zion, Uri and Yaari, Uzi, International Hedge of Fixed-Income Contracts. Journal of Portfolio Management, Vol. 27, No. 2, pp. 91-100, Winter 2001, Available at SSRN: https://ssrn.com/abstract=1089223

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management ( email )

P.O. Box 653
Beer-Sheva 84105
Israel
+972 2 651 3939 (Phone)
+972 7 6472896 (Fax)

Government of the State of Israel - Israel Securities Authority

22 Kanfei Nesharim Street
Jerusalem 95464
Israel

Miron Rozenkranz

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel

Uri Ben-Zion

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel
(972-4) 829-4432 (Phone)
(972-4) 829-5688 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Uzi Yaari (Contact Author)

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

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