Hedging with Swaps Under a Parallel Shift of the Yield Curve

Hedging with Interest Rate Swap

“…In return, the first counterparty receives an interest at floating rate on the same notional principal and for the same period of time. It may be seen [1] that, the time-t value for such a swap (with respect to the point of view of the counterparty paying the fixed rate) is given by…”

“…In order to decide to hedge or not the considered swap portfolio, it is valuable to have a projection of the low and high bounds for the portfolio change value at the given horizon and under the view of ( more and less severe ) parallel shift mentioned above. When applying a criterion we introduce in our full paper [1], then one obtain the result which is summarized in Table II. In Table II, by *  we denote the value of %] 3 %; 3 [   which allows to attain the minimum or maximum of the portfolio change value. It is seen here that in the worst case, the potential loss when dealing with just a naked portfolio position can attain the size of 20 Millions of Euros, which corresponds roughly to 20 swaps.…”

“…Some of the arguments are presented in our (lengthy) working paper [1], where we have already analyzed the portfolio hedging using swaps and bonds. Parts of our findings are summarized and reported here.…”

“…In Section 2, we make a survey of our results, whose technical details are presented in [1]. Then a numerical illustration is displayed in the next Section 3.…”