Duration based Hedging strategies

ankuragrawal.nit
Finance Junkie
Posts: 64
Joined: Sun Apr 01, 2012 10:52 am

Duration based Hedging strategies

Postby ankuragrawal.nit » Sun Feb 12, 2012 6:45 pm

If I am long in a portfolio of bonds then why should be a rising Interest rate be of risk to me?
(My portfolio value decreases,how? )

Also If a hold a long position why should I short the futures contract. Should I always short the contracts irrespective of interest rates rising or falling?

Is the duration based hedging strategy (taught in pristine's notes) valid for small changes in yield only? If Yes, WHY?
( I assume it may be because duration itself is valid for small changes in yield being a linear relnship but intuitively why should this strategy be valid only for small changes in yield what if I have large changes in yield?
Does the formula gets modified that time, in that, the duration (of portfolio/ bonds ?) is replaced by convexity adjusted duration?

by "duration (of portfolio/ bonds ?)" I mean to ask which duration gets modified and why?

Please explain the statement "Duration implies that all yields are perfectly correlated"
What I didn't understand in the above statement is what is meant by "all yields"; isn't there only one yield?

perfectly correlated with?

please give an example of "non-parallel shift" also...

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ankuragrawal.nit
Finance Junkie
Posts: 64
Joined: Sun Apr 01, 2012 10:52 am

Re: Duration based Hedging strategies

Postby ankuragrawal.nit » Sun Feb 12, 2012 7:18 pm

"When hedges are constructed using interest rate futures, it is important to bear in mind that interest rate and future price move in opposite directions."
- John Hull,page 156 Edition 7
Why are they opposite to each other?

Kindly reply to the post...

ankuragrawal.nit
Finance Junkie
Posts: 64
Joined: Sun Apr 01, 2012 10:52 am

Re: Duration based Hedging strategies

Postby ankuragrawal.nit » Wed Feb 15, 2012 11:00 pm

Definitely :)


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