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
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: Suggested Citation