Hedging

Samsaveel · February 13th, 2011, 2:57 pm

Willmoters;is the DV01 sufficienet measure to use in order to hedge a portfolio made of bonds and vanilla swaps ? and what are the techniques used to hedge large curve movements?Thanks

ReallyOld · February 13th, 2011, 8:49 pm

Not sure that I fully understand your question but here goes:1) You need to consider the Treasury/LIBOR spread in your risk 2) We used (this is going back nearly 15 years) also looked at the sensitivity to changes in three-month forward rates. We essentially created a curve that consisted entirely of three-month IMM FRAs and valued the book. We then measured the sensitivity of the swap portfolio to changes in each three-month bucket. This report showed our risk to various points on the curve.Hope that I answered the right question!

Martinghoul · February 14th, 2011, 7:43 am

You may also, if you're feeling particularly interested, consider your portfolio's convexity. There are no special secret techniques to hedge curve movements, other than putting on an offsetting curve trade.

Samsaveel · February 15th, 2011, 1:12 am

i see, question an offsetting curve trade :is it a trade that is the mirror image of the original trade ?e.g long bond with maturity 5 years and payer swap with same maturity and fixed rate ,is this structure hedged?how can i find an approximation to the VaR of the swap,and structure ,and more general to a portfolio?cheers

Martinghoul · February 15th, 2011, 6:45 am

By "offsetting curve trade" I mean a trade that offsets the curve exposure in your book, whatever it might be. As to bond vs swap, that's swapspread exposure, which is smth ReallyOld mentioned (he used Trsy/LIBOR terminology, which is the same thing).I have absolutely no idea what VAR has to do with these issues in this particular context.