Abstract

GONZALEZ-ARECHIGA RAMIREZ-WIELLA, Bernardo; VENEGAS MARTINEZ, Francisco  and  DIAZ TINOCO, Jaime. Interest-rate Risk and Immunization for dollar Duration and dollar Convexity with Futures: local analysis and the Value at Risk. Inv. Econ [online]. 2000, vol.60, n.233, pp.77-112. ISSN 0185-1667.

In this paper we present a model to immunize a future stream of assets and liabilities against interest-rate risk by means of bond futures contracts. The investment decisions derived from the model reduce significantly the market risk. The concepts of dollar duration and dollar convexity play an important role in measuring and con­ trolling interest-rate risk. Specifically, the risk of small or moderate parallel shifts in the term structure of interest rates is controlled; there is no control on other risks. The robustness of the derived strategies is assessed in terms of the past behavior of the interest rate. From a sample of the term structure of bond discount rates, we generate the empirical distributions of the present value of a cash flow with and without hedging. The effects of risk on the present value before and after immunization are compared in terms of the variance reduction and the value at risk at a certain confidence level. An application is addressed by the way of illustration.

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