Risk management of a bond portfolio using options

J. Annaert (), G. Deelstra, Dries Heyman and M. Vanmaele ()
Additional contact information
M. Vanmaele: -

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: In this paper, we elaborate a formula for determining the optimal strike price for a bond put option, used to hedge a position in a bond. This strike price is optimal in the sense that it minimizes, for a given budget, either Value-at-Risk or Tail Value-at-Risk. Formulas are derived for both zero-coupon and coupon bonds, which can also be understood as a portfolio of bonds. These formulas are valid for any short rate model that implies an affine term structure model and in particular that implies a lognormal distribution of future zero-coupon bond prices. As an application, we focus on the Hull-White one-factor model, which is calibrated to a set of cap prices. We illustrate our procedure by hedging a Belgian government bond, and take into account the possibility of divergence between theoretical option prices and real option prices. This paper can be seen as an extension of the work of Ahn et al. (1999), who consider the same problem for an investment in a share.

Keywords: (Tail) Value-at-Risk; bond hedging; affine term structure model (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2007-05
New Economics Papers: this item is included in nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://wps-feb.ugent.be/Papers/wp_07_465.pdf (application/pdf)

Related works:
Journal Article: Risk management of a bond portfolio using options (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:07/465

Access Statistics for this paper

More papers in Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration Contact information at EDIRC.
Bibliographic data for series maintained by Nathalie Verhaeghe ().