Effectively hedging the interest rate risk of wide floating-rate coupon spreads
Thomas Schröder,
Kwamie Dunbar
Abstract:Bond issuers frequently immunise/hedge their interest rate exposure by means of interest rate swaps (IRS). The receiving leg matches all bond cash flows, while the pay leg requires floating rate coupon payments of form LIBOR plus a spread. The goal of hedging against interest rate risk is only achieved in full if the present value of this spread is zero. Using market data it is shown that under a traditional IRS hedging strategy an investor could still experience significant cash flow losses given a 1 per cent… Show more
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