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kfcnhl
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Posts: 73
Joined: July 28th, 2009, 3:56 pm

Fixed income management problem

March 30th, 2020, 12:31 am

First of all, hope everyone is safe and sound.

I would like to describe the following scenario and my thinking
Welcome any comments on my thought process!!!

3 swaps outstanding
1. Pay fixed 100mln, maturing Dec 2025, old swap entered back in 2015 with high coupon (~4%)
2. Rec fixed 100mln, maturing Dec 2022, new swap entered in Dec 2019
3. Pay fixed 500mln, maturing Dec 2025, new swap entered in Dec 2019

Q: how to hedge this portfolio of swaps using market rate swap today?

Starting with the exposure profile, we got 600mln payer in 5 years and 100mln receiver in 2 years

DV01 is about ((5-0.25)*600 - (2-0.25)*100)/10000 = 0.2675 mln
Hedging using 5Y Reciver @ market rate, 0.2675/((5-0.25)/10000) = 563 mln

Maintainance issues
-100mln of the 600mln payer is of the higher coupon, thus reducing the duration quite a bit.
So we should hedge a bit less by adjusted the duration?

-The 2Y rec fixed will expire sooner than 5years
2Y from now we will have 563mln hedges vs 600mln position, which means we need to hedge some more.

-This is of course also assuming parallel moves and 2Y/5Y spread stay constant
Should I use PCA to adjust the hedge ratio?

-Carry of original portfolio of swaps + new hedge
Negative carry as current swap rates are lower
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